Carlyle Group Inc, a private equity firm whose senior executives include former US cabinet members and ex-President George H.W. Bush, has turned a US$180 million 1997 investment in United Defense Industries Inc into US$1.2 billion.
Carlyle yesterday sold shares worth US$270 million in United Defense, which makes the Bradley fighting vehicle as well as artillery, naval guns, missile launchers and munitions. Carlyle has sold almost US$500 million in shares of the company in public offerings since 2001, pocketed about US$350 million in dividends before the company went public, and still owns about US$350 million of stock, according to Securities and Exchange Commission filings.
Many of the Washington-based firm's early investments were in defense and aerospace companies such as United Defense, Aerostructures Corp, Howmet International, and US Marine Repair; the firm now also seeks investments in telecommunications, automotive, energy and power, real estate and consumer goods.
"Clearly this deal has been very successful and they know what they're doing in defense," said David Snow, editor-in-chief of Alternative Universe, a private equity and hedge fund newsletter.
Early investment
United Defense was Carlyle's biggest investment in its first decade in business. Carlyle acquired United Defense in October 1997, buying out previous owners FMC Corp and Harsco Corp for about US$850 million, US$180 million of that in cash. The company's revenue has since grown to US$1.7 billion from US$1.2 billion, and it earned US$134 million last year, compared with a loss of US$123 million in 1998.
Earlier this year, Carlyle and Italy's Finmeccanica SpA bought the FiatAvio aircraft engines business from Fiat SpA for 1.5 billion euros (US$1.7 billion). Carlyle now is attempting to complete the biggest buyout in 14 years, the US$7 billion takeover of Qwest Communications International Inc's yellow-pages business with Welsh, Carson, Anderson & Stowe.
United Defense shares rose US$0.40 to US$25.79 at 12:09pm in New York. Yesterday's share sale, underwritten by JP Morgan Chase & Co and Lehman Brothers, was priced at US$25. The company went public at US$19 in December 2001 in an offering managed by Goldman Sachs Group Inc and Lehman.
Carlyle made its original investment through Carlyle Partners II LP, a US$1.3 billion fund raised in 1996. That fund posted returns of 27 percent a year through August of last year, according to records released by one investor, the University of Texas Investment Management Co. The firm, with 500 employees and assets of US$16 billion, has realized returns of 2.7 times invested capital on investment it has sold.
Exit strategies
Private equity firms are turning to public markets to help them book gains on investments as stock prices rise. Citadel Broadcasting Corp, owned by Forstmann Little & Co, yesterday sold US$418 million in an initial public offering, valuing the New York buyout firm's stake in the radio broadcaster at double what it paid two years ago.
Frank Carlucci, defense secretary under President Ronald Reagan and chairman emeritus of Carlyle, has been a director since 1997, as has former MCI Communications Corp chief financial officer William Conway, one of four founders of Carlyle, who serves as United Defense's chairman.
Carlyle collects famous names. Senior advisers include former UK Prime Minister John Major, former US Secretary of State James Baker, former Securities and Exchange Commission chairman Arthur Levitt, and Richard Darman, budget director under the former President Bush.
Levitt also serves on the board of Bloomberg LP, the parent company of Bloomberg News.
Connections count
At the time of its IPO, United Defense said Carlyle's connections helped its business.
"Our Board of Directors consists of members who have served in senior positions within the US Government, such as Secretary of Defense, Chairman of the Joint Chiefs of Staff and Commander-in-Chief of the United States Central Command," it said in its October 2001 prospectus. The management and board's "unique insights into the US Department of Defense and allied militaries is one of our key assets."
The company also said it planned to buy competitors.
"We intend to continue participating in the current consolidation of the defense industry by utilizing the business relationships of our senior management team, our Board of Directors, and the Carlyle Group to acquire companies with complementary products and technologies, as exemplified by our September 2000 acquisition of Bofors Defence," the company said.
Today it said Raytheon Co awarded a US$98 million contract to its Bofors Weapon Systems AB subsidiary for helping develop and demonstrate the Excalibur artillery projectile.
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