Muse first

John Muse and the rest of the Dallas leadership of Hicks Muse Tate & Furst say they have finetuned a ‘formula for success’, and it doesn't involve Europe, Latin America, high tech or Tom Hicks. David Snow reports.

Seated in a large conference room overlooking Dallas, John Muse proudly highlights several locally developed assets. “All of the Hicks Muse partners sitting heretoday are homegrown – none of them came to us as senior-level hires from another firm,” he says.

Muse is referring to Joe Colonnetta, Andrew Rosen and Peter Brodsky, all of whom were promoted to partner within the past four years and all of whom have worked at Hicks, Muse, Tate & Furst for at least the better part of a decade. They are the next generation of leadership at a firm that has gone through some important and often difficult changes over the past five years. Muse highlights the “homegrown” credentials of these new partners perhaps because doing so ties them to an impressive record that pre-dates a rather less impressive stumble in 1999 and 2000.

Jack Furst, a partner since 1989, the year the firmwas founded and, for the past five years, its chief operating officer, rounds out the team of five Dallas-based partners who oversee the core activity of Hicks Muse – sector-specific, middle-market private equity investments in North America. A sixth partner, Eric Neuman, monitors the Latin American portfolio.

Muse prefers to downplay the firm's previous adventures in other sectors and geographies, saying the most recent few years paint the most accurate picture of the firm's strengths and capabilities. Without a doubt, he says, the current Hicks Muse team is the best, most cohesive group he's ever worked with. Muse concedes that this certainty comes from previous hard experience of having pursued the wrong deals at the wrong time with the wrong mix of people. “We figured out what our success formula was, we got back on it three or four years ago and we've been driving against it ever since then,” says Muse.

The ingredients of Muse's success formula include: develop talent within the firm; focus specifically on certain sectors, such as media, food and energy companies in North America, all of which must have strong market positions and cash flows; partner with experienced and entrepreneurial management; and do deals of between $100 million and $1 billion in transaction value.

NON-CORE ELEMENTS
For a middle-market shop, Hicks Muse at one point had an unusually extensive range of experiences beyond this core strategy from which to define its current sweet spot.

In early 2000, Hicks Muse had operations in Europe and Latin America; in addition to its current core sectors, the firm was also investing hundreds of millions in early stage, publicly traded telecommunication services providers and Internet-related businesses; it had a real estate investment affiliate. In those heady days the firm was planning to raise nearly $7 billion in fresh capital for its various strategies and regions, and Hicks Muse looked poised to solidify a standing next to Blackstone, KKR and Carlyle as a private equity megabrand.

At the same time the firm's co-founder, Thomas Hicks, was making headlines for his ownership of Texas sports franchises and his involvement in local and national politics (he is a longtime supporter of George W. Bush).

Since then, most of the elements not in the mix of Muse's “formula” have fallen away. Hicks Muse saw a painful downturn in its telecom and tech portfolio and vowed “never again” to its limited partners. The firm exited its real estate affiliate, Olympus, in 2001 in a back-to-basics exercise. Although it maintains an office in Buenos Aires with five investment professionals, Hicks Muse has also dramatically downsized its Latin American operations and aspirations.

In 2002, the firm closed its fifth buyout fund on $1.6 billion after having launched fundraising in 2000 with a target of $4.5 billion. Fund IV had closed on $4.1 billion in 1998. Muse says Fund VI will likely target “either side of a billion”. The firm still has $300 million of “dry powder” left of Fund V.

Effective last January, Hicks resigned as chairman of the firm to increase his focus on the Dallas Stars, a hockey team he owns, and the Texas Rangers, his baseball team, among other personal investments. Muse, formerly the firm's president, is now the firm's chairman.

Although Hicks Muse has enjoyed success in Europe, its London team, led by Lyndon Lea, recently declared formal independence from the Dallas hegemon. Once Hicks Muse (Europe) completes its current fundraising, the firm plans on changing its name.

During this period of change, the partners of Hicks Muse have sought not to complain or explain to the media, although Hicks, a natural publicist, found this difficult. “We have purposely kept a low profile over the past three or four years and have let our performance speak for itself,” says Muse. “But now with Tom's retirement, we thought there was maybe not complete clarity in the marketplace on, ‘Who is Hicks Muse’?”

LESS IS MORE
Ina real way, Muse was part of Hicks Muse even before there was a Hicks Muse. Muse met Hicks in the 1980s while working on some of the tremendously successful investments sponsored by Hicks & Haas, a buyout firm co-founded by Hicks and Robert Haas (see “Hicks Muse milestones”, p. 59). Muse was at the time head of investment and merchant banking at Prudential Securities. Following the dissolution of Hicks &Haas, Hicks and Muse launched Hicks, Muse & Co. in 1989 and eventually raised a $270 million fund.

Muse, a graduate of the US Air Force Academy, has a military-like seriousness when discussing his business, but this is balanced by a Texas-style courtliness during informal moments.

While he does most of the talking during a recent interview, Muse frequently refers questions to his other partners. Brodsky, Rosen and Colonnetta also voice observations without hesitation or prompting. The men enjoy an easy interaction, one that has been forged at the office – and a bit of a departure from the days when former partners Hicks,, David Deniger and Dan Blanks, who had been roommates at the University of Texas, were referred to (by themselves and others) as the “Texas mafia”. In December, Blanks became the last Mafioso to retire.

Out of the office, the partners bond at an annual retreat while discussing firm business, as well as at weekly lunches (more business). They spend most of their personal time with their young families (between them is a total of 10 children under the age of 10). Only Muse plays golf (well). There are no hunting excursions, no boondoggles.

Rosen, 36, joined Hicks Muse in 1993 from The Carlyle Group; Brodsky, 34, joined the firm in 1995 from Credit Suisse First Boston in New York; Colonnetta, 43, joined in 1998 from C. Dean Metropoulos & Co., a Hicks Muse operating group consumer-branded product portfolio companies.

Muse, 53, says time spent by these three younger partners at Hicks Muse has been a key to bringing the firm back to the strategy to which its early success in its first decade can be attributed. “These guys have all grown up in the firm”, he says. “They've gone from the mid-level to leadership positions. It's really been a natural evolution.”

He adds: “As a result of some of the mistakes of the 1999 to 2000 period, we know that we get our best results from people that were grown internally, as opposed to lateral hires at senior levels. If we do the job of institutionalisation right, this firm will survive me and hopefully everybody in this room.”

Colonnetta, who was promoted to partner in 2002 following the departures of partners Michael Levitt and Larry Stuart – two lateral hires – says the new role has been energizing and empowering. “It has put the younger partners in a position to put our hand prints on the franchise going forward”, he says.

LIFE AFTER TOM
The younger partners give Muse great credit for a leadership style that has turned Hicks Muse into the firm it is today. But the history of the franchise bears the very big and distinctive hand prints of one Tom Hicks.

To the question of what will change at Hicks Muse now that Hicks is gone, Muse has a simple answer – not much. “Anyone who's been close to us and aware of how we've been operating over the past three to four years knows that Tom was spending somewhat less time than in prior years on the firm's day-to-day operations while devoting a portion of his time and energy to his investments in the sports teams and real estate,” says Muse. “He was here and actively involved in all investment committee decisions, but responsibility for driving the business day to day has been widely shared across the entire partnership group for quite a long time.”

Hicks, the son of a Texas radio station owner, is a man with a large personal presence. The new leadership of Hicks Muse admits that the Tom Hicks brand and the Hicks Muse brand often seemed fused. “Tom is a big personality, and there is a tendency to associate the firm with one man because it's simpler”, says Colonnetta. “But this firm has been more than one man since inception, and it has specifically been this group for a number of years.”

Adds Brodsky: “If you talk to the management teams or sources from which we get our deal flow, the fact that Tom has now retired doesn't impact any of those relationships that we all have.”

Muse is eager to note the differences between the firm's fourth fund and the current fund, which is smaller and composed entirely of food, media and energy investments – three broad sectors in which Hicks Muse has a long history. Current portfolio companies include Regency Gas, bought from Charlesbank Capital Partners in a $405 million deal; Kerns Oil & Gas, a $50 million transaction; Swift Foods, a meat processor bought from ConAgra in a $1.4 billion transaction; and Centennial Puerto Rico Cable TV, acquired from a Blackstone portfolio company for $155 million.

date the fifth fund has had two extremely successful exits – food company Pinnacle Foods and Yell, a UK directories publisher (and a participation alongside the Hicks Muse (Europe) fund).

The recent strong performance, says Muse, is the result of Hicks Muse sticking to what it knows best. Muse says the focus on specific industries allows the firm to better compete at auctions, to find and attract top management and to better enhance the value of portfolio companies once acquired.

Brodsky, who focuses on media deals, says his firm's experience bidding for and purchasing Centennial Puerto Rico is a good example of the sector-focused approach working as anticipated. “We identified this as an attractive investment opportunity early in the sale process and the seller had confidence that, given our expertise in cable, we could get the deal done even though we were not necessarily the highest bidder”, he says.

More than any firm, Hicks Muse would like LPs to think “focus” when they hear the name “Hicks Muse”. Perhaps unfairly, the firm's history is often cited as a case study in style drift because of its disastrous investments in capitalhungry, publicly traded telecom companies during the tech boom, although most other large US private equity firms fell victim to the same irrational exuberances. The firm was hit hard in 2000 when the market for telecom and tech stocks collapsed, but it was also among the first to acknowledge its mistakes. “Some people tried to sweep it under the rug, but we were very visible in our mea culpa,” says Muse. “We recognised that we had gotten off message, along with a lot of other firms.”

Muse, who now calls the telecom deals “ancient history”, says most of the firm's long-time LPs are still supportive. But he adds: “Unfortunately, some of our LP base that began their relationship with us in Fund IV – we obviously didn't get off on the right foot with them. Hopefully the ones that continued investing with us in Fund V have been pleased with our performance.”

“People have long memories,” says Rosen. “But those days have been displaced in most people's minds by the reality that John and Jack are leading a next generation of partners who have been putting very different deals on the books and generating solid performance.”

Despite the renewed focus, the Hicks Muse Dallas team has not been without some franchise-related distractions, mostly legacies of its former expansionist ambitions. The firm continues to oversee investments in Latin America, including a major, controlling interest in CEI Citigroup Holdings, Argentina's largest phone and cable operator. Following a dramatic downturn, Muse says 2004 was a good year for the firm's Latin American portfolio companies. But he adds: “The region is not going to be a permanent part of our franchise for one reason – we're not comfortable taking on that macroeconomic risk.”

In Europe, Hicks Muse has been successful, but the firm has just completed a rather acrimonious divorce from its London operation. Muse says that Dallas-base Hicks Muse Tate & Furst and the former London team currently doing business as Hicks Muse (Europe) will continue to collaborate from time to time on deals to the extent that target investments have transatlantic business. “We really achieved our objectives with respect to Europe,” says Muse. “We went over there feeling like this style of investing would be highly differentiated and would work, and it has.”

The Dallas team was “able to do a very good job of transferring a lot of the sector knowledge that we developed here over the last ten to 15 years to our colleagues in Europe,” adds Brodsky.

BRAND VALUE
The former European colleagues would appear to want the sector knowledge but not the name Hicks Muse. But in Dallas, the partners continue to view the name as a valuable asset. Particularly within its three core industries, Muse says the name “Hicks Muse” continues to attract sellers and helps seal deals. He relates an example of this: “We were recently approached by a large multinational food company that was interested in acquiring another large multinational food company. They couldn't acquire it on their own. Out of all the people they could have called, they called us, which I think is a testament to how we are perceived out there.”

Brodsky explains that sellers equate the name Hicks Muse with integrity and the ability to close and close quickly. “That has tremendous value,” he says.

Muse notes that simple longevity has its own value: “The Hicks Muse brand has been in the US for 17 years. We don't have a problem getting a meeting; we don't have to introduce ourselves.”

HICKS MUSE MILESTONES
1984: Thomas Hicks and Robert Haas form Hicks & Haas in Dallas.

1986: In a franchise-making deal, Hicks & Haas beats Coca Cola to buy the bottling operations of Dr Pepper and Seven-Up for $416 million and $240 million, respectively.

1989: Hicks and Haas go their separate ways. Hicks teams with Prudential Securities banker John Muse to form Hicks, Muse & Co. The new firm raises $270 million for a first fund. Jack Furst, formerly a Hicks & Haas partner and before that with First Boston, is named a partner of Hicks Muse.

1991: Charles Tate, formerly of Morgan Stanley, is named a partner.

1993: Dr Pepper/Seven-Up goes public, generates a 1,200 percent IRR for investors and turns Hicks' $1 million personal investment into $30 million.

1993: Hicks Muse II closes on $800 million

1994: The firm changes name to Hicks, Muse, Tate & Furst Incorporated, reflecting the contributions of Charles Tate and Jack Furst.

1995: The firm joins with DLJ real estate veteran David Deniger to create Olympus Real Estate Corporation .

1996: Fund III closes on $2.54 billion

February 1998: Hicks Muse IV closes on $4.1 billion, giving the firm the third-largest buyout fund in the market, behind KKR and Warburg Pincus.

May 1998: Hicks Muse teams with KKR on Regal Cinemas investment.

August 1998: Hicks Muse debut Latin American fund closes on $960 million.

October 1998: Partner Alan Menkes departs.

March 1999: Hicks Muse opens London office. Principal Jeff Fronterhouse leaves firm; later cofounds Brazos Private Equity Partners.

April 1999: The firm does the first of several PIPE deals – a $250 million investment in telecom services provider RCN. Subsequent similar investments included Teligent, ICG Communications, Rhythms NetConnections, Viatel and RCN Corp; the firm preps a small Internet investment fund.

April 2000: Hicks Muse closes debut European fund on €1.5 billion.

December 2000: Eric Neuman is named a partner.

April 2001: Hicks Muse exits Olympus Real Estate and vows to focus on “back to basics”, middle-market private equity deals. Partner Larry Stuart retires.

May 2001: Anshutz and Oaktree Capital wrest control of Regal Cinemas from Hicks Muse and KKR, causing the original owners to lose $500 million each; meanwhile, in London, the firm joins Apax Partners in the £2.14 ($3 billion) acquisition of yellow pages company Yell.

July 2001: Hicks Muse enjoys $3.2 billion Triton Energy exit through sale to Amerada Hess.

August 2001: New York partner Michael Levitt departs; Latin America specialists Cesar Baez resigns as Latin America Fund II target is slashed; Peter Brodsky is named a partner.

January 2002: Fund V closes on $1.6 billion, having been launched in 2000 with a target of $4.5 billion.

May 2002: The firm buys the meats division of ConAgra Foods for $1.4 billion.

June 2002: Charles Tate retires and thereafter launches a medical royalties fund.

December 2002: Joe Colonnetta and Andrew Rosen are promoted to partner.

July 2003: Hicks Muse and Apax reap a windfall in the IPO of Yell, the biggest London floatation in two years.

October 2003: Hicks Muse Europe launches fundraising for Fund II with a target of €800 million to €1 billion.

January 2004: Hicks Muse Europe adds KKR's Neil Richardson

March 2004: Tom Hicks announces he will retire the following March. The retirement date is later moved forward to December 31, when IR head Dan Blanks also retires.

July 2004: The Dallas headquarters agrees to alter the compensation of the London team so as to assign carry from European deals almost entirely to the European team.

January 2005: Hicks Muse (Europe), led by Lyndon Lea, legally separates from the Dallas team and announces plans to take on a new name.