What Is Repackaging in Private Equity?
Let me explain repackaging in the private equity industry: it's when a private equity firm buys all the stock in a troubled public company, taking it private with the goal of revamping its operations and reselling it at a profit.
For years, the main aim of repackaging was to prepare the company for a return to the market through an initial public offering (IPO). Lately, though, private equity firms have discovered other ways to maximize profits that involve less regulatory and shareholder scrutiny.
Key Takeaways
Understand that repackaging in private equity means a firm acquires all stock in an ailing public company and revamps it to make it more profitable. If successful, the firm might reintroduce the company to the stock market via an IPO. The capital for this purchase is usually borrowed, known as a leveraged buyout.
How Repackaging in Private Equity Works
A private equity firm identifies an unprofitable or underperforming company and buys it outright, believing it can be turned around. Once it's private, the firm can implement measures like selling divisions, replacing management, or cutting overhead costs.
The goal could be to take the revamped company public with a new IPO, sell it to another private buyer, or merge it with larger entities. If the repackaging succeeds, the firm makes more money than it spent on the revival.
Most of the purchase money is borrowed rather than from the firm's cash reserves, so it's typically called a leveraged buyout.
Cashing in on Repackaging
Repackaging aimed at launching a new IPO has been lucrative for private equity firms. In 2020, there were 22 IPOs from private equity buyout firms, with an exit value of $74.5 billion.
However, this strategy seems to have lost appeal. The number of such IPOs has declined since 2013, with a small uptick in 2018 and a surge in 2020.
Private equity firms appear to prefer easier, more profitable ways to cash in, given the scrutiny public companies face from government, regulators, and shareholders.
Take Burger King as an example: it had multiple owners, including Pillsbury, before TPG Capital bought it in 2002, retooled it, and launched a successful IPO in 2006. Just four years later, during the Great Recession, it was in trouble again and taken private by 3G Capital. Today, Burger King is a subsidiary of Restaurant Brands International, headquartered in Toronto but majority-owned by Brazilian firm 3G, which also owns Tim Hortons and Popeyes.
Real-World Examples
Private equity repackagings are common, including Panera Bread and Staples.
Panera Bread was taken private in 2017 by BDT Capital Partners and JAB Holding Co. in a $7.5 billion buyout. These firms had previously acquired Peet's Coffee and Tea and Krispy Kreme Doughnuts. As of 2021, Panera might go public again after JAB's $800 million refinancing deal.
Staples was bought by Sycamore Partners for $6.9 billion in 2017. It had acquired rival OfficeMax and was worth about $19 billion in 2010, showing its decline. There was an assumption Sycamore would exit via IPO in 2020, but that hasn't happened yet.
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