DAVID BONDERMAN FLIES HIGH--AND AGAINST THE WIND
Continental is only one of the Texas dealmaker's contrarian coups
When David Bonderman, a Texas dealmaker, led a $450 million recapitalization of Continental Airlines in 1993, there were enough skeptics to fill a 747. The airline was in bankruptcy court--for the second time. The airline industry was losing billions of dollars. And Bonderman himself was a little known quantity. He had earned a good reputation working for billionaire Robert M. Bass. But now he was on his own, and Continental was his first deal.
Bonderman, who presides over Texas Pacific Group, his main investment vehicle, soon showed what would become his modus operandi: jumping into situations that others shun, consummating shrewdly crafted deals, and then getting his hands dirty making them work. At Continental, Bonderman engineered an extensive management shakeup and restructuring.
Now, the nation's fifth-largest airline is posting record profits and soaring to the top of the rankings for on-time performance. In the first quarter, the airline turned a profit of $88 million, the fourth consecutive quarter of record results. Its Class B stock was up more than 600% last year, making it the best performer on the New York Stock Exchange. It now trades at $56 a share, a hefty gain from the $8 (adjusted for warrants) that Bonderman and TPG affiliate Air Partners paid. "Obviously, we can't be too unhappy about where we are," says Bonderman, who is chairman of Continental.
"REMARKABLE." On April 22, Bonderman and other Air Partners investors announced that they will sell off a portion of their Continental position in a secondary offering, which will allow them to reap some of those gains. Bonderman personally stands to gain about $7 million. Still, Air Partners will be able to increase its voting power from 44.6% to 52.2% because Continental investor Air Canada is cashing out much of its stake and converting A shares to B shares.
For Bonderman, being a contrarian comes naturally. When others zig, he zags. For instance, when talk of health-care reform was roiling that industry, Bonderman grabbed a stake in a managed-care company. "He's a remarkable dealmaker," says Richard E. Rainwater, himself a legendary moneymaker.
Continental isn't Bonderman's only winner (table). TPG's annual returns have been about 35% to 40%, says Richard G. Coffey, director for private investments for the Pennsylvania Public School Employees' Retirement System, which invested $25 million with TPG in April, 1994. Returns for TPG's stakes in publicly traded companies range from 84% to 135%. Only one deal, a small investment in a Mexican bank, has been a disappointment, thanks to the peso's collapse. "We're pleased with what we've seen," says John B. Fewel Jr., senior equities investment officer for the Oregon Public Employees' Retirement Fund, which has invested $50 million with TPG.
Another unusual feature of TPG's style is the variety of its deals, ranging from leveraged buyouts to joint ventures to large stakes in public companies. TPG's $720 million fund is managed by Bonderman with three partners and eight other professionals. The size of the stakes varies, but "we always insist on a modicum of control," says Bonderman.
Keeping up the deal flow, however, won't be easy. Thanks in part to Bonderman's track record, TPG faces more competition for the deals it likes to do. And so far, the firm's returns are largely on paper. "In the end, you have to get the cash back," says Matthias B. Bowman, managing director at Merrill Lynch & Co., a TPG fundraiser and investor.
Bonderman, 53, a Harvard-educated lawyer who once worked in the Justice Dept.'s Civil Rights Division, first caught investors' attention with his track record with Bass, whom he joined in 1983. Some of his deals racked up triple-digit annual returns. "The man just has tremendous instincts," says Thomas J. Barrack Jr., another former Bass aide. Bonderman was a key player in Robert Bass's investments such as American Savings Bank, then the largest recapitalization of a failed thrift.
In late 1992, Bonderman struck out on his own. "It seemed like the right time to take off your clothes and jump in the frying pan," says the press-shy Bonderman in an interview in his Washington (D.C.) office. He has an office and a home in Fort Worth, but spends weekends at his home in Washington with his wife and three young children. Raised in Los Angeles, he's known for his love of rock-and-roll and his rumpled appearance. "The clothes are expensive, but not well orchestrated," says an ex-Continental executive.
Bonderman's younger colleagues often play the lead roles in identifying and executing TPG's deals. James G. Coulter, 36, was recruited to the Robert Bass organization straight from Stanford University's business school, then left with Bonderman to form TPG. William S. Price, 40, is a former Bain & Co. consultant who advised Bonderman on some of his Bass deals. Coulter and Price both have veto power over new investments. "David's general view is, if he can convince me of doing something, it's worth doing," says Coulter. Richard P. Schifter, 43, a new addition, was a partner at Arnold & Porter in Washington, where Bonderman was once chief litigator in Braniff Airways' bankruptcy.
The Continental deal shows off the TPG team's savvy as both financial engineers and hands-on managers. In late 1994, when Continental Lite--a low-fare, Southwest Airlines Co.-style clone--was failing miserably, Bonderman backed the ouster of Chief Executive Robert R. Ferguson III and his replacement by Gordon M. Bethune, an industry veteran. "Generally speaking, you like to dance with the girl that brung you, and if you can't, sometimes you have to shoot her," quips Bonderman. TPG also pushed a reorganization that included shrinking Continental's fleet and dropping Continental Lite. TPG's Price was at Continental almost daily for months helping to restructure operations, while Schifter renegotiated aircraft leases. Even before the crisis, Bonderman was involved in the details: Airline executives recall that after he was served a horrible meal on a Continental flight to Mexico, he sent the offending dish to headquarters.
TPG's other Chapter 11 airline deal also looks like a winner. Backed by Continental, Mesa Air Group Inc., and Fidelity Investments, TPG brought America West Airlines Inc. out of bankruptcy in August, 1994. By selling some shares in a secondary offering in February, TPG gained $54 million, more than recouping its $43.6 million initial investment. It still owns stock worth $87.3 million that translates to a 44% voting stake. "I think they got the airline cheap," says Michael J. Conway, former CEO of America West, who was allied with competing bidder Michael Steinhardt.
CARAMEL. With its fund about half invested, TPG is now aiming for businesses it believes will be strong when the economy turns down, such as food and beverages and oil and gas. Last August, TPG bought Kraft Foods Inc.'s caramel and marshmallow unit for an estimated $200 million. And it has targeted the wine business, where it sees growing demand and consolidating distribution channels. With Silverado Partners, a California investment group, TPG recently bought Nestle's profitable wine business for an estimated $350 million. It's already adding to its holding with a $25 million-plus deal to buy a small California winery.
TPG hasn't lost its appetite for airlines. It is weighing an investment in a low-cost European carrier just acquired by Richard Branson's Virgin Group. Bonderman declined comment, but he has already done a deal with Branson. The two teamed up, along with real estate investor Colony Capital, to buy 116 movie houses in the Britain-based MGM Cinemas chain from troubled French bank Credit Lyonnais (page 136). Bonderman figures that Britain will soon be swept by the multiplex boom.
Austin M. Long III, vice president of private investments for University of Texas Investment Management Co., questions how long private equity players like TPG can sustain their stellar returns with so many institutional funds throwing in their money. "No amount of genius will make up for a true reversal in the market as a whole," says Long. Until then, though, Bonderman is likely to keep on flying high.By Wendy Zellner in Dallas, with Paula Dwyer in LondonReturn to top