Legendary dealmaker Teddy Forstmann decided to stop making new investments in 2004 after losing more than $1.5 billion on two telecom investments that went bust. It was even sued by one of its LPs as a result for allegedly breaching fiduciary trust, resulting in a $15 million settlement.
But the bad news isn’t over for the founder of Forstmann Little.
A Forstmann Little portfolio company, Citadel Broadcasting, stumbled into bankruptcy over the weekend under a $2 billion debt load, sapped of its strength by weakening revenues and profits from evaporated advertising sales in the radio industry. The New York Times reported Monday that Forstmann Little lost $250 million on the bankruptcy filing.
The company, which Forstmann Little acquired in 2001 for roughly $2 billion using about $743 million in equity, has already ironed out an agreement with more than 60 percent of its lenders that will reduce its debt load by about $1.4 billion. The agreement would restructure the company’s $2.1 billion secured credit facility into a new term loan in the principal amount of $762.5 million.
Holders of senior secured claims would receive a share of the new term loan and 90 percent of the stock in
Forstmann acquired the company’s predecessor, Citadel Communications, in 2001 and took the company public in 2003, raising $448 million in the initial public offering. After the IPO, Forstmann gained 80 percent of the company’s shares.
In 2006, Citadel entered a merger with The Walt Disney Company, a deal which took Forstmann’s ownership stake down to about 42.5 percent, according to bankruptcy documents. The merger included new financing that in part paid a distribution to pre-merger shareholders like Forstmann.
More recently, the economic downturn combined with the company’s high debt load battered Citadel’s financial stability.
“Coupled with Citadel’s highly leveraged capital structure, the effects of the economic downturn beginning in 2008 (which has continued through 2009) forced Citadel to consider a variety of options to de-lever its balance sheet and address the continuing impact of the slow economy,” the company’s chief financial officer, Randy Taylor, said in court documents.
Citadel considered a sale of the company, but rejected the bids it received and chose to go into restructuring. Forstmann Little’s Citadel investment accounted for about 39 percent of its sixth equity fund and about 33 percent of its MBO Fund VII, according to documents from the Connecticut State Treasurer. Connecticut’s state pensions invested in the firm’s funds.
Forstmann Little was once one of the elite firms in the private equity universe, achieving average returns of 60 percent for its investors, according to a 2004 article from Forbes. That all changed with two telecom investments that went bust after the dot-com bubble burst – XO Communications and McLeodUSA. The investments resulted in the loss of more than $1.5 billion for the firm.
Connecticut’s Treasurer Denise Nappier sued Forstmann Little for the investments, charging that the firm had acted “with gross negligence, in bad faith or with willful misconduct”. The firm settled with Connecticut for $15 million.
In 2004, in an interview with the New York Times, Forstmann said he was quitting the buyout business and would not be making new investments. He also admitted he knew little about the telecom sector and made the investments because he felt the world was passing him by.