PE Firms Tap Debt Mart For Leiner Recap

North Castle Partners and Golden Gate Capital have tapped UBS, Morgan Stanley and Credit Suisse First Boston to lead a $650 million recapitalization for vitamin manufacturer Leiner Health Products. The bank debt portion will comprise a five-year, $50 million revolver and seven-year, $240 million term loan, said Peter Shabecoff, a managing director with North Castle. There will also be a $150 million bond deal. Shabecoff said it was too early to discuss pricing on the financing, which is expected to launch next month. North Castle currently owns almost 80% of Leiner, after acquiring the company in 1997 through its North Castle Fund I. Golden Gate is coming into the deal and North Castle is reinvesting in the company with a new fund. "We did an auction for Leiner. Golden Gate won and came to us and said, 'We'd love to have you, North Castle, as a partner going forward,'" Shabecoff said. "We continue to believe Leiner is a great investment but we needed liquidity because we've been in it for seven years." Shabecoff said the two private-equity firms will basically be equal partners and management will continue to have a large stake in the company.

Scotia Bank led the original bank deal in 1997 and continued to lead the company's debt through a refinancing. Leiner had about $170 million of existing senior debt. CSFB was the M&A advisor on the sell side, Shabecoff said, commenting on the selection of the leads. "UBS has had a great deal of success in the consumer-healthcare market. We know that UBS is strong and has good knowledge of the sector and Morgan Stanley is very strong--in the high-yield market in particular," he added.

North Castle's experiences with Leiner have not always been smooth. Leiner went into bankruptcy in 2002 and emerged 49 days later. This was due to a "unique, bizarre one-time depression to its earnings that forced it into a difficult financial situation," Shabecoff said. In 2000 and 2001, the U.S. Department of Justice broke up a price-fixing cartel by the major raw materials suppliers to the vitamin industry. Raw material prices plummeted rapidly by as much as 70%. "Leiner was sitting with $150 million inventory, which was now dramatically overpriced relative to the market," Shabecoff noted. "Since then we've turned the company around and it has become dramatically more profitable."

Leiner officials referred calls to Shabecoff. A Golden Gate spokeswoman declined comment.