Texas Pacific Group Inc.

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Texas Pacific Group Inc.

301 Commerce Street, Suite 3300
Fort Worth, Texas 76102
Telephone: (817) 871-4000
Fax: (817) 871-4010
Web site: http://www.texpac.com

1993 as Air Partners L.P.
Employees: 20
Sales: $75 million (1999 est.)
NAIC: 523910 Venture Capital Companies

Texas Pacific Group Inc. (TPG) is a private investment partnership involved in leveraged buyouts, joint ventures, and large-stake purchases of companies. The investment group focuses primarily on buying financially troubled companies with brand-name recognition. Typically, TPG does not involve itself in the day-to-day operations of the companies it controls, but it does provide strategic direction. TPGs holdings include Del Monte Foods Company, J. Crew Group, Ducati Motorcycles, Beringer Wine Estates, On Semiconductor, ZiLOG, Bally International, Oxford Health Plans, and Piaggio S.p.A.

Founders Background

The central figure behind Texas Pacifics formation and growth is David Bonderman, a Los Angeles native whose renowned deal-making talents arose from an eclectic professional background. He was a Phi Beta Kappa graduate of the University of Washington in 1963, a distinction that helped him earn admittance to Harvard Law School, where he was awarded his postgraduate degree magna cum laude in 1966. After a year studying Islamic law at the American University of Cairo, Bonderman moved to New Orleans and taught law at Tulane University for a year. Next, he moved to Washington, D.C., and spent a year working as an assistant in the Justice Departments civil rights division, before joining the prestigious Washington, D.C., law firm Arnold & Porter. At Arnold & Porter, Bonderman quickly distinguished himself, becoming known for his work on high-profile and controversial cases, notably the complex 1982 bankruptcy reorganization of Braniff International Airlines. Bonderman also provided legal assistance on historical preservation cases as part of his pro bono work, particularly litigation involving Washington, D.C.s Union Station and the citys storied Willard Hotel. Bondermans pro bono work also took him outside the nations capital. One such case ultimately led to his decision to create TPG.

During the early 1980s, a citizens group in Fort Worth, Texas, pitted itself against the federal government. The Fort Worth residents were fighting against a proposed federal highway that they claimed would despoil the citys historic district. Significantly, the group was led by Robert Bass, one of four Fort Worth brothers whose inheritance from a wildcatter great-uncle had been built into a multibillion-dollar family fortune. Bonderman was hired to argue against the proposed highway and prevailed, impressing Bass a great deal and, unwittingly, steering his professional career in an entirely new direction.

Bass was immensely wealthy, but the 35-year-old was itching to aggrandize his already considerable fortune and to establish a name for himself. His eldest brother, Sid, had been responsible for the Bass brothers fame and fortune, parlaying their $50 million inheritance into $4 billion through a series of spectacular business deals he concluded with the help of his advisor, Richard Rainwater, one of the countrys celebrated investors. Robert Bass spent more than a decade watching the headline-grabbing maneuvers of his brother and he pined for his time in the limelight. He wanted to emulate his elder brother and distance himself from him at the same time. He wanted to make his own fortune and he asked the 41-year-old Bonderman to lead the investment team he was gathering. Bonderman immediately agreed. On the day he finished his last case for Arnold & Porter in 1983winning a dismissal from the Supreme CourtBonderman packed his bags and moved to Fort Worth to spearhead the growth of the leveraged buyout (LBO) company Robert M. Bass Group.

LBO firms, which use the asset value of a target company in order to finance the debt incurred in acquiring the company, were few in number when Bass and Bonderman entered the fray in 1983. During the 1980s, Kohlberg Kravis Roberts & Co. (KKR), one of the industrys pioneers, attracted national attention from its massive and shrewd takeovers, but aside from KKR there were few LBO firms of note. Most of those involved in the industry acquired established companies in industries characterized by consistent cash flows, targeting companies they perceived as undervalued. Bonderman, in his new role as Basss investment lieutenant, adopted a different approach, targeting financially troubled companies, those with labyrinthine financial structures, and companies facing an uncertain regula-tory future.

Bonderman Builds His Reputation in the 1980s

Initially, The Bass Group moved into cable television, pur-chasing stocks soon after the federal government deregulated cable-television pricing in 1984. Bonderman completed his first deal in cable television two years later, acquiring Wometco Cable TV. Like most of Bondermans deals to follow, the $645 million purchase of Wometco was highly leveraged, with Bonderman offering only $62 million in equity. By the early 1990s, the cable television market had matured as Bonderman had anticipated, fueling a sixfold increase in Bass Groups initial investment. Bondermans first success was followed by a string of others, galvanizing his reputation as a savvy deal-maker. Among the transactions that earned Bonderman praise was his $250 million acquisitionentirely debt financedof the Plaza Hotel in New York City, which was sold seven months later to Donald Trump for $410 million. Also in 1988, Bonderman pushed for the $400 million acquisition of American Savings & Loan not long after the California savings and loan concern had been seized by the government. Bonderman presided over the liquidation of billions of dollars of assets and orchestrated the thrifts recovery. By 1997, Bass Groups $400 million investment was worth $2 billion. Bondermans record of success continued into the 1990s, highlighted by the $388 million he used to gain control of National Reinsurance Corp. His strategy paid off two years later when National completed an initial public offering, giving the Bass Group a sevenfold increase on its initial investment.

The pivotal deal in Bondermans career and the catalyst for the formation of TPG occurred in 1993. It was a moment that demonstrated the contrarian inclinations of the countrys upand-coming investor. Continental Airlines, mired in its second bankruptcy within a decade, became the object of Bondermans attention in 1993, Aside from its own profound financial problems, Continental was embroiled in protracted labor disputes and ensconced in an industry rocked by the recessive economic conditions that pocked the early 1990sadditional aspects of the airlines misfortune that made the most speculative investors keep their distance. Bonderman disregarded the consensus and wanted to push ahead with the deal, but Bass balked at the proposal. Bonderman responded by submitting his resignation. He was certain the Continental deal had lucrative potential.

To move forward with his buyout of Continental, Bonderman formed Air Partners, the predecessor venture to TPG. To aid in his bid, Bonderman enlisted the help of James Coulter, who had been part of the investment team at Bass Group, serving as Bondermans closest advisor. The pair soon raised $66 million, enough to acquire a 42 percent controlling interest in Continental in April 1993. Bonderman brought the airliner out of bankruptcya $9 billion reorganizationand reversed the companys fortunes considerably. Ultimately, the investors in the Continental buyout recorded a 1,000 percent return on their investment, as Continentals operating income surged to $716 million in 1997 from a loss of $108 million during the year preceding the buyout. More important for the future capital raising efforts of TPG, Bonderman was hailed as Continentals savior.

TPGs 1993 Formation Triggers Spending Spree

TPG was formed in 1993, not long after the creation of Air Partners. Air Partners had been created to facilitate the acquisition of Continental, an impromptu partnership that brought investors together for a specific purpose. Bonderman and Coulter wanted a more lasting organization, however, and formed TPG, a private investment partnership, as a permanent vehicle for their deal-making in all types of industries. Bonderman established his office in Fort Worth and Coulter set up the main office in San Francisco, which represented the rationale behind the name the two partners chose: Texas Pacific Group. In San Francisco, Coulter was joined by a third partner, William Price. Previously, Price had been in charge of strategic planning and development at General Electric Capital Corp. His experience as a consultant was tapped by Bonderman and Coulter to help recruit the managers who would run TPGs companies. Bonderman and Coulter carried on the same type of professional relationship they had forged at Bass Group. Bonderman, the visionary, was responsible for creating the ideas, Counters task was to turn Bondermans ideas into reality, and Price was charged with ensuring that the reality worked smoothly.

As TPG got underway, the partnerships greatest asset was the esteemed investment record of Bonderman. Based largely on his reputation, the venture was able to raise $720 million for its first investment fund in 1993, $220 million more than the partners had expected. With this capital, TPG announced in its prospectus to investors that it would be pursuing complex transactions, focusing on industries undergoing change, and applying cautious contrarianism. A flurry of investment deals followed, as TPG became arguably the most prominent investment company in the 1990s.

Key Dates

Founder, Bonderman, acquires bankrupt Continental airlines; forms Texas Pacific later in the year.
Texas Pacific invests in AT&T Paradyne, Beringer Wine, Ducati Motorcycles, and Del Monte Foods.
Firm invests in J. Crew Group.
Firm invests in ZiLOG and Oxford Health Plans.
Texas Pacific invests in Piaggio S.p.A, Bally International, and Motorolas SCG Holding.
Texas Pacific invests in Gemplus S.A., Seagate Technology, and Petco Animal Supplies.

TPGs least successful deals occurred early in the private equity companys history. In 1995, the group acquired 45 percent of Newscope Resources Ltd. for $40 million and, in partnership with another investment group, acquired the caramel and marshmallow businesses belonging to Kraft General Foods Inc. Newscope, a Calgary-based energy and production company with operations in Louisiana, Mississippi, and Texas, was renamed Denbury Resources Inc. In the years following the name change, the company struggled to withstand falling energy prices and its profits plunged. Krafts $150-million-in-sales caramel and marshmallow businesses were combined after TPGs investment and renamed Favorite Brands International. The companys stature swelled after an acquisition spree made it the fourth largest candy firm in the United States, but the expansion came at a price. By the end of the 1990s, Favorite Brands had proven itself to be one of TPGs more troublesome investments, as the candy makers interest expenses exceeded its cash flow.

TPG recorded more encouraging results with its investments in 1996. The year included four memorable investments that demonstrated the wide scope of Bondermans acquisitive eye. In a $175 million deal, TPG acquired AT&T Paradyne, a modem manufacturer that pioneered digital compression technology. Bonderman also demonstrated his willingness to invest in foreign companies, completing the intricate buyout of Italian motorcycle manufacturer Ducati Motorcycles. The other notable acquisition in 1996 reflected TPGs interest in growth indus-tries. The company paid $395 million for Nestle S.A.s Wine World Estates (renamed Beringer Wine Estates Holdings), which gave Bondermans investors a stake in the California wine industry before the expansion of distribution channels brought domestic wines to the mass market. By the end of 1996, TPGs influence as a strategic agitator had produced enviable results. The group recorded a return rate on its investments of 105 percent.

After its success with its first investment fund, TPG had little problem raising the capital for its second, the TPG Partners II fund. The group raised $2.5 billion in 1997, which it immediately wanted to put to use. A rapidly growing stock market, however, forced TPG to restrain its acquisitive activities, but the year featured two massive deals nonetheless. First, TPG completed the $800 million buyout of Del Monte Foods Company, the largest branded canner and distributor of fruits and vegetables in the country. In October, the investment group completed a $560 million deal for J. Crew Group, a clothing company struggling to add retail stores to its foundation of catalogue sales. In 1998, two more significant investments were made, as TPG gambled heavily on troubled health maintenance organization (HMO) Oxford Health Plan through a $350 million investment. The investment group also completed a $416 million buyout of semiconductor manufacturer ZiLOG, an acquisition that signaled TPGs newly reached decision to invest in the technology sector.

As TPG entered 1999, it was in the final stages of investing the capital raised for the TPG Partners II fund. No longer hesitant, the investment group threw itself headlong into the LBO market, completing a series of investments. Internation-ally, the company acquired Piaggio S.p.A, the Italian manufacturer of Vespa motor scooters; Bally International Ltd., the Swiss luxury shoe designer; and Great Britains Punch Taverns, the operator of approximately 1,500 pubs in England, Wales, and Scotland. TPG added to its HMO holdings by investing $75 million in Magellan Health Services Inc., the nations largest behavioral healthcare company. In the technology sector, the investment group increased its presence by investing $337 million in the semiconductor components group of Motorola Inc., which was renamed On Semiconductor.

By the beginning of the new century, TPG was ready for its third round of investments, having concluded the 1990s as perhaps the most high-profile investment group in the country. Bonderman and his team were able to raise $4 billion in early 2000 to ensure that TPG would remain at the forefront of its industry in the coming years. For the immediate future, TPG was expected to increase its investments overseas, particularly in Europe, and deepen its involvement in the technology sector by buying into semiconductor and telecommunications companies. The companys progress during the first half of 2000 indicated as much, as Bonderman spent more than $740 million on technology-related acquisitions during the first six months of 2000. The largest of these acquisitions occurred in March 2000, when TPG completed the biggest tech-related private equity transaction in European history, investing $450 million in Gemenos, France-based Gemplus S.A., a leader in smart cards and software for wireless applications. With considerably more capital at its disposal, TPG promised to attract further attention as it pressed forward with its LBO activities, intent on exponentially recouping its investments in the global marketplace.

Principal Subsidiaries

Bally Management Ltd.; Beringer Wine Estates Holdings, Inc.; Del Monte Foods Company; Denbury Resources Inc.; Ducati Motor Holding S.p.A.; J. Crew Group, Inc.; ON Semiconductor Corp.; Punch Taverns Group Ltd.; ZiLOG, Inc.

Principal Competitors

Kohlberg Kravis Roberts & Co.; Hicks, Muse, Tate & Furst Incorporated; Clayton, Dubilier & Rice, Inc.

Further Reading

Atlas, Riva, Thrills! Chills! Hondo Hondo Spills?, Institutional Investor, January 1999, p. 32.

Carlsen, Clifford, Bigger in Texas: New Buyout Fund Hits $2.3 Million, San Francisco Business Times, April 4, 1997, p. 21.

Elliot, Heidi, Finding Value in Maturity, Electronic News, August 31, 1998, p. 42.

Grover, Mary Beth, Technoleverage, Forbes, May 29, 2000, p. 202.

Harbert, Tarn, Texas Pacific Group Continues High-Tech Investing Spree, Electronic Business, June 2000, p. 30.

Rutberg, Sidney, J. Crew Founders Get Big Bucks in Texas Pacific Deal, Daily News Record, December 12, 1997, p. 12.

Trigaux, Robert, Texas Group Pays $175 Million for Modem Maker AT&T Paradyne, Knight-Ridder/Tribune Business News, June 20, 1996, p. 6200229

Werner, Ben, Texas Investor Ropes 20% of Magellan, Baltimore Business Journal, July 23, 1999, p. 1.

Jeffrey L. Covell

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Texas Pacific Group Inc.