Golden State Deal Offers Glimpse at Big Private Co.
By SHERRI CRUZ
A team led by the chief executive of Irvine-based Golden State Foods Corp. is acquiring the rest of the food distributor in a rare leveraged buyout.
The pending deal, financed by Golden State borrowing, offers a look into one of the area’s largest privately held companies. With yearly sales of $2 billion, Golden State is OC’s second largest private company after Newport Beach life insurer Pacific Life Insurance Co.
Mark Wetterau, Golden State’s chief executive, is leading the bid to buy out the majority of the company from billionaire Ron Burkle, founder and managing partner of Los Angeles investment firm Yucaipa Cos.
Officials from both companies declined to comment on the deal, which is expected to close this month.
The deal stands to be among the larger buyouts in OC and perhaps the county’s only leveraged buyout this year, said Murray Rudin, who heads the Irvine office of Los Angeles-based private equity investor Riordan, Lewis & Haden.
“They don’t happen in OC very much,” he said.
Nationwide, there only are two to three leverage buyouts a month, Rudin said.
In recent years, bringing on private equity investors for big deals has supplanted leverage buyouts, which took on a stigma in the 1980s. Yet debt deals still appeal to owners who want to retain control and are able to borrow at reasonable cost. That could be the case for Golden State.
Golden State Foods is one of McDonald’s Corp.’s largest suppliers, providing the chain with beef patties, Big Mac sauce, buns and other items. It’s also a supplier to Triac Cos.’ Arby’s.
The company counts 2,000 workers in all, including about 35 at its headquarters on Von Karman Avenue near John Wayne Airport.
After the buyout, Wetterau Associates, a Brentwood, Mo.-based investment firm controlled by Golden State’s Wetterau and brother Conrad, is set to own about 65% of the company, according to a report by Moody’s Investors Service Inc.
Other Golden State managers and workers are set to own about 35%.
Moody’s recently rated about $285 million in proposed loans and bonds by Golden State, assigning various “B” or “speculative” ratings to the debt.
The proceeds of the borrowing are set to go toward the buyout of Yucaipa and the refinancing of existing debt.
How the borrowing breaks down: a $135 million loan, maturing in 2011; a $30 million loan, maturing in 2009; and $90 million in new notes, maturing in 2012.
Moody’s also rated a $30 million revolving line of credit that matures in 2009.
Sources close to the deal said it puts Golden State’s enterprise value,equity and debt,at $500 million to $700 million.
The relatively low enterprise value compared to Golden State’s revenue reflects the company’s role as a distributor that sees big sales from passing along products but low profits.
Moody’s rated Golden State’s debt as speculative because of what it called the company’s already high debt, low profit margins and limited free cash flow to pay off debt. The debt rating agency didn’t provide actual numbers for Golden State.
It also cited Golden State’s dependence on McDonald’s for the rating.
“McDonald’s experienced flat volume and sales trends until recently, which resulted in lower volumes and constrained profitability for Golden State,” Moody’s said.
The upside: McDonald’s has “historically stable operating performance and cash flows,” Moody’s said.
The ties to McDonald’s date back to the 1950s, when founder Ray Kroc tapped Golden State to supply its eateries. The late William Moore started Golden State in 1947.
Golden State’s rivals include the smaller Ohio-based Anderson-DuBose Co., a regional supplier to McDonald’s with about $197 million in yearly sales, and Pennsylvania’s Keystone Foods LLC, a burger supplier with $2.6 billion in annual sales.
Yucaipa and Wetterau Associates bought Golden State Foods from New York-based Butler Capital Corp. in 1998 in a deal worth roughly $330 million, according to financial publication Daily Deal.
Back then, the company was estimated to have $1.5 billion in sales, $25 million in earnings and 2,050 workers.
In the pending buyout, Yucaipa’s Burkle stands to triple his money, making about $110 million on his 1998 investment, sources said.
Besides being an investor and prominent Democratic political donor, Burkle made his fortune buying and selling supermarkets such as Alpha Beta, Food 4 Less and Ralphs.
The Wetteraus’ ties to Burkle go back to the late 1980s.
They were bidding against each other for Almac’s Supermarkets. Yucaipa won, but Burkle enlisted the Wetteraus to take over the warehouses and supply the stores.
Later, the Wetteraus sought out Yucaipa as a financial partner in the Golden State deal, according to the St. Louis Business Journal.
The Wetteraus have been involved in the grocery distribution business since 1869. Patriarch Ted, who recently died, was president of Hazelwood, Mo.-based Wetterau Inc., a food distributor.
The Wetteraus sold Wetterau Inc. in 1993 to Minnesota’s SuperValu Inc. for $1.1 billion. Then Mark and Conrad Wetterau formed Wetterau Associates and began scouting for deals.
