With its public option off the table, Santa Barbara-based Select Staffing is returning its focus to family ownership and a fundamentals-first approach to growth.
Select, a temporary staffing firm, is the largest private company in the Tri-Counties, with revenue last year of $1.5 billion. Saddled with $535.5 million in debt and facing pressure from lenders to reduce its leverage, Select announced plans in December to merge with Florida-based Atlas Acquisition Corp.
The deal could have put Select on the New York Stock Exchange and helped it pay down $200 million of its debts. After giving Select more time to make its case, Atlas shareholders voted the merger down Feb. 12.
Atlas did not return e-mails and phone calls requesting comment. In a statement at the time the deal fell apart, Select said it would rely on revenue growth and an improving economy to guide its strategy as a private company.
But documents filed in advance of the canceled deal show that Select restated its combined $28.6 million in profits for 2007 and 2008 and instead recorded losses of $34 million for the two years. The documents also showed complicated tax arrangements surrounding an $80 million payout that Select Chief Executive Officer Steve Sorensen received during a recapitalization of the company in 2007.
Select’s leaders, who declined to comment for this story, did not say how the company plans to deal with creditors that include Bank of the West parent Bank Paribas, which led a $400 million recapitalization and a $200 million financing described as an “accordion loan” for Select in 2007. Company leaders said Select’s 3.6 percent increase in 2009 revenue was a “testament to our business model.”
Select’s brief flirtation with public ownership could have brought new investors into the Select Family of Staffing Companies, but the deal’s collapse returns Select to a more traditional relationship with its owners: A marriage between one family, the Sorensens, and one parent firm, Koosharem Corp., which shares its name with a tiny hamlet of 400 people in Utah.
“We wish the outcome were different,” Select Chief Executive Officer Steve Sorensen said in a release. “Select has operated very successfully for 25 years as a private company, so for us it is back to business as usual.”
Select has not disclosed details of its agreements with lenders but has said that $350 million is due at the end of 2014. In many commercial lending arrangements, when profits fall below a certain mark, the lender can call in the loan. Without giving specifics, Select said the company’s reassessment of its books in late 2009 showed it in violation of its agreements.
“If the financial statements, as restated, were used to determine covenant compliance, the company would not have been in compliance with the covenants” by October, Select wrote in filings with the Securities and Exchange Commission.
Select said its old financial statements — the ones showing profits instead of losses — were used to determine whether it lived up to its agreements until the third quarter of 2009. It has not said how its compliance will be measured going forward.
Before the vote on the merger, Atlas shareholders also learned scattered details of an $80 million payout that Steve Sorensen received during Select’s 2007 recapitalization. During a phone interview in December, Steve Sorensen said the payout was originally a dividend but was later structured as a loan to him that would eventually be forgiven.
“It really had to do with the technical read of the balance sheet by the lenders. We don’t have a lot of tangible equity in the company,” Steve Sorensen told the Business Times. “If you go take a whopping dividend when there’s not a lot of equity on the balance sheet, that could imply insolvency. That puts lenders in a tough spot,” he said, adding that “it wound up being more of an accommodation from me to them.”
Steve Sorensen said the complex procedures surrounding the loan’s potential forgiveness were designed to limit how much he’d pay in taxes on the income. Select has not said how those arrangements might change in light of the failure of the Atlas deal.
“It was originally $80 million or something like that, but over the course of time, I’ve put a lot back in,” Steve Sorensen said in December. “If the capital position of the company can accommodate it, the thesis is that I will be compensated for some of the tax liability. I’ve got to think about how to square up with the IRS. Hopefully, I’ll have some recourse to mitigate that income event.”
In a release Feb. 12, Select President Paul Sorensen said the company had eked out $52 million in revenue growth during a difficult year for the staffing industry.
“Select’s ability to grow nearly 4 percent during 2009 is a testament to our business model,” Paul Sorensen said in a release. “We are now focused on capitalizing on the improving fundamentals to grow our business in 2010.”