Move On Down

How the housing slump caused the best-laid plans of private equity to go awry.
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"I also want to be perfectly clear that we have no plans to file for bankruptcy," the chief executive of Sirva, the parent company of Allied Van Lines, told investors in November.

Today Sirva filed for Chapter 11 bankruptcy protection.

This reversal, in less than three months, shows how quickly the housing market has deteriorated, putting a damper on corporate-relocation services.

But the fall of Sirva is also the story of how a private equity firm transformed a company, built it up, pocketed the returns, and then largely sold out before that company went off the tracks.

Clayton, Dubilier & Rice formed what would become Sirva by merging North American Van Lines with Allied Van Lines in 1999. At that point, it was a transportation company.

But a Clayton Dubilier partner, Jim Rogers, once a longtime General Electric executive, had a bigger vision.

Instead of merely offering moving services, Sirva (which got its name in 2002) would become a comprehensive relocation services provider. While other relocation companies outsourced the various services any corporate client needs for moving its employees, Sirva wanted to have them all in-house, offering a one-stop shop for government agencies and large companies like Chevron, Dell, and KPMG.

Rogers led the company through a flurry of acquisitions in the first few years after its formation. Sirva soon provided everything from mortgage origination to title services to transportation to real estate assistance.

Seeing opportunity in a booming housing market, Sirva even offered "risk abatement" services to its corporate and government clients: If your employee's house doesn't sell within a certain period of time, we'll buy it ourselves.

It was a gamble that paid off, at first. And it was a savior for Clayton Dubilier. While Sirva was gobbling up companies, the private equity firm was suffering blow after blow: Three companies in its portfolio went belly-up between 1998 and 2003, resulting in $1 billion in losses. Sirva was the firm's answer to its troubles.

Sirva raised $389 million in an initial public offering in November 2003. Priced at $18.50, its shares fell during the first couple of weeks on the market, but reversed course by early in the next year.

By the middle of 2004, Sirva was prepared to tap the public markets again, and Clayton Dubilier was ready to pocket its hard-earned profits from the venture. A secondary offering in June of that year, priced at $22, let the private equity firm unload a big portion of its stake in the company.

The firm collected about $430 million from its initial equity investment of $179 million. But Clayton Dubilier still held on to nearly a third of Sirva's outstanding shares, and Rogers and other principals from the firm remained on its board.

It turns out that Clayton Dubilier got out at precisely the perfect moment. By the end of 2004, Sirva had begun finding accounting irregularities in its books. An earnings shortfall led to a delay in filing its annual report, which led to more shortfalls, restatements, and delays in its quarterly results.

Sirva, meanwhile, continued to pay Clayton Dubilier its advisory fees through 2005, which averaged about $1 million a year. The private equity firm agreed to waive the fees in 2006 and 2007.

By September of 2006, Sirva shares had sunk to $2.50 and it needed help paying for its mounting Sarbanes-Oxley compliance costs. This time it turned to two hedge funds, ValueAct Capital Partners and MLF Investments, for $75 million in a private placement offering.

Also by this point in 2006, the housing market was showing very clear signs of significant trouble ahead. But the hedge funds, which also gained two board seats with their investment, were convinced that once the accounting mess had been cleaned up, the company would land on its feet.

But Sirva, Jim Rogers' winning bet, was turning into another loser in the Clayton Dubilier portfolio. In December 2006, Rogers left the board of Sirva and stepped down as a partner at the private equity firm.

ValueAct and MLF remained shareholders as things continued to disintegrate at Sirva during 2007. At the end of December, ValueAct finally decided to call a loss a loss and sold its entire stake in Sirva common stock-8.6 million shares-for the sum total of $1. MLF, with a much smaller stake, remains a shareholder today.

A Clayton Dubilier spokesman declined to comment on Sirva beyond noting that the firm made 2.5 times its investment in the company. The firm won accolades for its 2005 buyout of Hertz, as well as its role in the acquisition of HD Supply last year under particularly trying circumstances.

Sirva's chief executive, Robert Tieken, himself a 35-year veteran of General Electric, is left to guide the remnants of the troubled company through bankruptcy. As of the end of September, Sirva had 799 unsold homes in its inventory, up 59 percent from the prior year. The company says it expects to emerge from bankruptcy in a few months.

During that November conference call, Tieken acknowledged that the company had problems. "Although we can hope for an improving U.S. real estate market and a more accommodating capital structure, this is not going to help Sirva," he said.

And in what could be an epitaph for Sirva, he added, "Hope is not a business strategy."

 

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