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Select slashes debt with public option

By   /   Monday, December 21st, 2009  /   Comments Off on Select slashes debt with public option

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In the region’s second major going-public transaction this year, Santa Barbara-based Select Staffing has agreed to a deal that would let it pay off $200 million in debt and become listed on a major stock exchange.

With $1.4 billion in revenue in 2008, Select, a temporary staffing services firm, is the largest privately held company in the Tri-Counties. The company said Dec.  11 that it plans to join up with Florida-based Atlas Acquisition Holding Corp., a publicly traded “blank check” firm that exists to buy into an operating company and has about $200 million in assets.

But as with Dole Food Co., the region’s other big public stock issuer this year, the transaction involves shedding millions of dollars of debt while allowing owners keep control at the same time.

Fueled by dozens of acquisitions, Select has expanded rapidly in recent years. In 2006, it bought Aliso Viejo-based RemedyTemp, a publicly traded firm, for $169 million in cash and took it private. The deal doubled the size of the company overnight.

To make its acquisitions, Select took advantage of what Chief Executive Officer Stephen Sorensen called the “wildly generous” credit markets of the mid-2000s. In 2007, Select inked a leveraged recapitalization with Bank of the West and its parent, Bank Paribas, for $400 million with the option to borrow up to $200 million more when acquisition opportunities came up.

But Select also became highly leveraged and has faced increasing pressure from lenders in the past year. By October, Select had accumulated $535.5 million in debt, had pledged everything it had as collateral and had no room left on its revolving credit lines, according to a proxy statement filed in connection with the going-public transaction.

In a telephone interview, Sorensen said some of Select’s creditors, who had once been comfortable with a leverage ratio of almost six times raw earnings, pressured the firm to come up with cash and slash its leverage ratio by something like 50 percent.

“We’ve had to come to grips with the fact that the credit markets are not what they were and probably never will be again,” Sorensen told the Business Times. “We’ve had to come to terms with the fact that we’re going to have to reset our balance sheet and take a little more traditional approach to leverage.”

In the deal, Select plans to pay off about $200 million in debt. That includes paying off some debt to second-in-line creditors with shares that could be worth 13.4 percent of the company.

With the transaction, Select is joining Westlake Village-based Dole, which had held the title of largest private company in the region until its $446 million initial public offering in October.

Dole’s owner, real estate magnate David Murdock, had put Dole up as collateral for hundreds of millions of dollars in debt for his personal projects, including the Four Seasons Westlake Village. About $85 million of the money from Dole’s public offering went to pay off Murdock’s hotel-building debt in exchange for letting Dole off the hook as collateral. After the transaction, Murdock remained in control of Dole with about 60 percent of the stock.

Select also stands to come out of its going-public transaction with its current owners still largely in control of the company.

The deal would leave in place Select’s current leaders, including CEO Stephen Sorensen, President Paul Sorensen and Chief Financial Officer Jeff Mitchell. Select’s current shareholders — primarily Stephen Sorensen — would get more shares of the newly combined company than anyone else, with an opportunity to gain an outright majority if Select can reduce its debt before the deal closes and meet profitability and stock price goals next year.

“There’s no question that the planets have to align” for Select’s shareholders to gain a majority in the new company, Stephen Sorensen said. But even if they don’t, Stephen Sorensen would still own 44 percent of the shares in the public company, according the proxy statement filed for the transaction. That would make the firm a “controlled company” on the New York Stock Exchange, where it hopes to trade, and would exempt Select from some requirements for independent directors on its board.

The deal also might secure a payout for Stephen Sorensen by forgiving a loan to him with a balance between $49 million and $74 million if the firm’s balance sheet recovers. At Select, Stephen Sorensen had included an $80 million dividend for himself during the then-private firm’s recapitalization in 2007, a deal Sorensen said couldn’t happen in today’s credit markets.

“When we got into the fine print of it, the lending community decided that rather than have it be an outright check to me, they’d rather it be a loan,” Stephen Sorensen said. “I got the dividend in 2007, but during the recession I’ve actually had to put a lot of money back into the company.”

For its part, Florida-based Atlas had compelling reasons to jump into a deal. As a so-called “blank check” firm, it’s a repository where investors have pooled $200 million with the intention of buying into an operating company. It faces a January deadline to do so. At the deadline, ordinary shareholders would get their money back, but the firm’s founders stand to lose $5.8 million they put in for early-stage stock that would become worthless.

Atlas Chief Executive Officer Jim Hauslein said that Select presented a good opportunity for his company’s shareholders regardless of deadlines.

Though Select has a lot of debt at the moment, Hauslein said, it maintains a nationwide network of franchises poised to capture temporary staffing business as the economy gets back on its feet. And if Select’s shares come to trade near the price of its publicly traded competitors, Atlas shareholders would get a good deal, Hauslein said.

“We really think this is the right time,” Hauslein told the Business Times. “Employers who cut headcount a year ago cut it to the bone. If the economy stabilizes, staffing does well, and if the economy recovers, staffing does really well.”

Stephen Sorensen said the capital infusion gives Select a way to keep expanding while putting on the table the option of tapping the public markets for capital if needed.

“We were not going to be able to continue to play our strategy in the credit markets,” Stephen Sorensen said. “On the other hand, the equity markets have recovered nicely. This allows us to give our creditors the comfort they need and allows us to go forward.”

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