DALLAS – Citing a depressed public equity market and smaller alternative asset allocations among existing limited partners, Hicks, Muse, Tate & Furst Inc. has lowered expectations on the target close for its fifth investment vehicle, Hicks, Muse, Tate & Furst Equity Fund V. Once expected to close at $4.5 billion, the new fund will likely not exceed $3 billion, Senior Partner Thomas Hicks said.
“It’s a tough year in the economy,” he said. “Whether it’s a coming recession or a tough landing, that could be an interesting time to be in the market. Prices look to us as low as they have been in the last 10 years. We’re going to proceed slowly and cautiously.”
On the upside for Hicks Muse, in December the firm notched a first close for the fund on $1.2 billion. The firm also snagged four times its original investment with the sale of G.H. Mumm & Cie and Champagne Perrier Jouet to Allied Domecq PLC and added Eric “Rick” Neuman as its ninth partner.
Focusing the Fund
Proceeding with caution, Hicks Muse will move away from some of the capital-intensive, high-tech deals that have dotted its portfolio and caused skittishness among investors recently.
Hicks Muse has already guaranteed LPs a 20% IRR on the fund’s $200 million basket of technology investments to assuage nervous investors. The firm will concentrate its investments and leverage the upside potential of sectors where acquisition prices are at historical lows – media, branded food, consumer products and manufacturing.
“It’s a back-to-basics approach – where our traditional domain expertise is,” Hicks said.
For the $1.2 billion close announced in mid-December, Hicks Muse rounded up most of the money from its core, or repeat, investors. The firm acknowledges the challenging fund-raising market, but understands there is simply less capital to go around right now, said Partner John Muse.
The back-to-basics approach gives more significance to the promotion to partner of Neuman, who has a great deal of experience with media and communications. He joined Hicks Muse in 1993 and has been primarily responsible for the formation of Chancellor Media, which became AMFM Inc. and has now merged with Clear Channel Communications.
“Rick is the most knowledgeable person in the firm about media, and it signals that we’re back on message with the four areas we want to focus on,” Muse said.
Neuman’s ascension to partner marks Hicks Muse’s first internal promotion for someone that has been with the firm for a “long time,” Muse said. The firm added Dan Blanks, who had a college connection with Hicks, as its eighth partner in 1997.
“Three or four years ago we took a strategic step to start growing our own people,” said Muse. “This means recruiting analysts and associates out of the industry and out of business school, train them and bring them up through the system.”
Hicks Muse agreed to sell Mumm and Perrier Jouet to Allied Domecq on Dec. 13 for approximately $506 million (e575 million).
In one of the first transactions to be made through its European fund, Hicks Muse purchased the champagne companies in July 1999 for $310 million (u293.5 million), which included $163 million in debt. Allied will acquire the companies debt free and Hicks Muse will repay the $113.9 million of debt that is still outstanding.
During the short ownership, Hicks Muse managed to perform cost reduction moves, which paid down debt and increased the value of its equity, Muse said.
The opportunity to sell the businesses had a lot to do with the change in control going on at Seagram, Mumm and Perrier-Jouet’s former owner.
Evidently, Hicks Muse made a distribution agreement with Seagram at the time of purchase in 1999 stating that the buyout firm would price and promote the champagne, but Seagram’s distribution and sales force would continue to deliver it. A provision in the contract said that if there was ever a change in control at Seagram, the distribution agreement could be broken at Hicks Muse’s option.
“With the sell of Seagram to [Britain’s] Diageo, Allied saw an opportunity that would allow them to get around the distribution agreement and that presented pretty significant synergies,” Muse said. “And they were prepared to pay us for those synergies.”
Looking to Latin America
The firm continues to be bullish in Latin America. Equity Fund V will make investments in the region – up to 30% of the fund’s capital may go into Latin America and Europe. Also, the firm is expected to hold a first close later this week on its second fund targeted at Latin America. Still, while originally targeted at $960 million, the fund will likely raise no more than $400 million at its final close.