Tuesday, April 19, 2011

Carlyle Group Continues Pre-IPO Monetization

The Carlyle Group will monetize two affiliates, The Mill through direct sale and Wesco Aircraft via an independent public offering (IPO).  As The Mill sale is private, information is scant.  Not the case with Wesco, its S-1 reveals interesting tidbits, including a private equity underwriter (PEU) strategy, the management fee:

Wesco paid Carlyle $1.2 million, $1.0 million, $1.1 million for the years ending September 30, 2008, 2009 and 2010, respectively, related to the Management Agreement.
Carlyle likes businesses where Uncle Sam foots the bill, at least a nice chunk of it.  The military represents 53% of Wesco's end users.

Wesco likely received fastener orders from Vought Aircraft Industries, a Boeing 787 Dreamliner contractor and former Carlyle affiliate:

Recently, Boeing began in-sourcing portions of its supply chain management system in an attempt to reduce its costs

We estimate that 10% of our net sales during fiscal 2010 were derived from sales to a number of customers related to the Boeing 787 and that approximately 20% of the parts we held in inventory primarily pertained to the Boeing 787.

We have recently been notified by Boeing of its intent to perform certain supply chain management functions in-house that we are currently providing at two Boeing facilities, under JIT contracts that were awarded to us when these particular facilities were under different ownership (Vought?).

In fiscal 2010, sales under these contracts accounted for approximately 5.8% of net sales. If production of any of the programs we support is terminated or delayed, or if our sales to customers affiliated with these programs are reduced or eliminated, our business, financial condition and results of operations could be adversely affected.
Vought gunked up the Boeing 787 production line, which received a tangential mention from Wesco.

We increased our inventory in anticipation of deliveries of the Boeing 787, which have been significantly delayed.

Fasteners contributed to the Dreamliner's tortuously slow start.  Vought's CEO encouraged employees to keep the faith in June 2007.

Boeing projected first flight in late August (2007) and first delivery next May.

The 787's first flight leaked from August 2007 to December 2009.  First delivery went from May 2008 to third quarter 2011.

Who might clarify Wesco's involvement in the Vought/Boeing quality debacle?  Carlyle's Peter Clare could shed light, as he was on the board of both Carlyle affiliates.. 

During the years ended September 30, 2009 and 2010, the Company maintained approximately 22% and 20%, respectively, of its inventory in parts that are primarily used in Boeing 787 aircraft. To date, Boeing has experienced a number of delays in completion of this aircraft. As such, there is a risk that the Company will not be able to realize some portion of this investment.

Thus, public shareholders should take the risk.  PEU Carlyle will realize gains on as many investments as possible, pre-IPO.  It looks like one huge profit-gasm.

Update 4-20-11:  Carlyle's "carry maximization" includes moving its stake in 650 Madison Avenue.  Bloomberg ran a piece on PEU real estate aspirations. "Carlyle is in the process of raising a new fund for U.S. property deals."

Update 7-29-11:  Carlyle expects four times its original investment even though Wesco priced below its expected range.