Learn how to buy businesses in 5-minutes or less, once a week. Lessons & specific tactics on how invest your money and generate cash flow for your life.
🔑 They made 11x on a business no one wanted to buy
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Welcome to The Business Buying Academy with Sieva Kozinsky. 🔑 If you’re a business owner looking to improve cash flow, take 60 seconds to read this.​ That’s why I recommend taking a look at WithCoverage. I know the team and trust their approach. But in my opinion, that’s a mistake. It’s a misalignment of incentives. Not great if you're trying to run multiple lean, cash-flowing businesses like me. They charge a flat fee (not a commission). You get a dedicated risk management team of insurance experts and attorneys. They make 40+ A-rated carriers compete on price. (Versus 2 or 3 like traditional brokers). Here’s what one of their clients said: "20%+ cost reduction, better protection, and significant time savings. A total win-win for our portfolio companies and management teams." If you’re looking to save on insurance and put that money back into your business, I’d talk to WithCoverage. ​Get a free and confidential risk analysis from WithCoverage​ (Thanks to WithCoverage for sponsoring this newsletter.) 🔑 Making 11x on a business no one else wanted Let's fly back to early 1993. A new private equity group was about to buy a hated business in a hated industry. Most investors wanted nothing to do with it. Continental Airlines was stuck in Chapter 11, its second trip through bankruptcy in a few years. The business was bleeding money, cursed by a reputation as one of the least-loved carriers in America, and operating in an industry famous for destroying capital. Enter David Bonderman and Jim Coulter and their new firm TPG (Texas Pacific Group). Today TPG is a giant, managing over $300 billion across its PE, credit, real estate, and other groups. But back then, it was a new partnership looking to make its first big deal. It wasn't even a private equity firm yet; the first deal was a special-purpose vehicle set up by the two partners. They looked at Continental, stuck in bankruptcy limbo without a buyer, and saw a contrarian setup:
Private equity was weary of the airline industry. Just a few years earlier, Carl Icahn got into a messy battle over the airline TWA in the mid-1980s. Icahn faced bitter fights with labor unions, battled multiple strikes, took harsh criticism for stripping the business of assets and pocketing fees for himself, and finally brought the airline back to bankruptcy in 1992. The 1989 acquisition of Northwest Airlines didn't go much better. Alfred Checchi’s Wings Holdings group (with partners including KLM) won a bidding war and took Northwest private for $4 billion, the largest airline takeover at the time. The deal loaded the carrier with debt right before the early-1990s recession and Gulf War fuel spike. With those airline failures fresh in everyone's minds, nobody really wanted to buy Continental. But this deal seemed different to Bonderman and Coulter. They formed Air Partners and teamed up with Air Canada for a roughly $450 million equity infusion. The structure was a regulatory tightrope walk. U.S. law capped foreign control of an airline, so Air Canada put up more cash but got fewer voting rights. Air Partners (the TPG group) ended up with the heavier voting stake despite putting in less money. Creditors took equity in the reorganized company, old debt got wiped or converted, and Continental staggered out of bankruptcy in April 1993.
It took nearly 3 years to emerge from bankruptcy. Then came the unglamorous part: actually running the business. Bonderman became chairman. They hired new management. They cut the fleet, fixed operations, improved on-time performance, and stopped the endless self-inflicted wounds that caused the business to go bankrupt in the first place.
The airline rose from the bottom to the top of federal rankings for on-time performance and profits followed. Having made a loss in excess of $100 million in the year prior to the takeover, Continental reported a profit of over $700 million in 1997.​ ​ - Net Interest newsletter​ Within a few years the investment group was able to sell its stake around 10x EBITDA, roughly an 11x return on the original investment. That single deal launched Texas Pacific Group (now TPG). What started as a special-purpose vehicle became a full-fledged private equity firm that went on to buy everything from J.Crew to Burger King.
The deal established Bodmerman and Coulter’s credentials, giving them the taste for more. To do the Continental deal, they’d set up a special purpose vehicle; to do something more durable they’d need a firm...In 1994, they went out to raise their first fund, targeting $500 million. Compared to other firms, it was a modest ask; Blackstone was out raising its second fund of $1.4 billion, and KKR was on its seventh, its fund sized at close to $2 billion. ​ - Net Interest Newsletter Sieva What did you think of today's newsletter? Rate this newsletter using the poll below: Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning. |
Sieva Kozinsky
Learn how to buy businesses in 5-minutes or less, once a week. Lessons & specific tactics on how invest your money and generate cash flow for your life.
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