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The Deal - Helping The Sick
March 2, 2006

Having a knack for finding and fixing underperforming companies has long been a specialty of private equity boutique Littlejohn & Co. LLC, the Greenwich, Conn., firm founded by chairman and CEO Angus Littlejohn Jr. and President Michael Klein in 1996.

Klein cites the recent example of PSC Inc., a bar-code scanner maker that it sold in October 2005 for a tidy profit. Not long ago, PSC was a troubled, publicly traded business that Littlejohn acquired in a pre-arranged bankruptcy in 2003 for about $50 million. Two years later, Littlejohn sold it to Bologna, Italy's Datalogic SpA for $195 million, or about 3.5 times their original cost. While PSC may have had more problems than other investments, it's this type of risk-taking that characterizes many of the firm's undertakings.

Starting in 2001, Klein, along with colleagues David Simon and Steven Raich, watched as PSC floundered. Its core scanner business was basically sound, but Klein says earnings suffered because of the downturn, as well as major litigation brought on by competitors and an acquisition spree that piled on the debt. Littlejohn spotted some upside, however.

"What we saw was a business that had a leading position in the supermarket checkout sector, but we also saw that its R&D team had a few new products that could recapture market share that they had lost," says the 41-year-old Klein.

The $170 million company continued to deteriorate during the sale, and several financial buyers who thought it had far too many problems in fact dropped out. Littlejohn stayed put throughout the yearlong process, noting opportunities for operational changes where others didn't.

Generally, says Klein, "We put ourselves in the role of the manager, and determine what can be done with these companies."

In taking PSC private, Littlejohn provided $20 million of equity and $30 million of debt. Klein, who became interim CEO, led the effort to settle litigation, reorganize management, recruit key managers, cut burn rates, and focus on new product lines in its core market. By the time it sold the company to Datalogic, its revenues were approaching $250 million and the $12 million Ebitda had doubled. On a blended basis, the $195 million sale came to 3.5 times total cost, but the firm says it works out to a 7 times return on its equity outlay. PSC was only the first realization on Littlejohn's $550 million, second fund raised in 1999, though it expects more payoffs to come.

Based on fair market value of realized and unrealized capital, Ramsay says its first two funds have a blended gross internal rate of return of about 21% "not bad for all the heavy lifting."

by Vyvyan Tenorio

The Deal

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