You wouldn't think that a mortgage lender in Jacksonville, Fla., and a fruit drink company known for quirky television ads would have a lot in common. But the sale of both made huge profits for the same renowned leveraged buyout artist, Thomas H. Lee.
"HomeSide is the Snapple of the financial services industry," said Gerard Cassidy, an analyst with Tucker, Anthony & Co.
Thomas H. Lee & Co. and another venture capital firm, Madison Dearborn Partners, collectively own about 26% of HomeSide Inc., which agreed this week to be bought by National Australia Bank for $1.23 billion.
Mr. Lee attained near-mythical status with investors in 1994 by selling Snapple Beverage to Quaker Oats Co. for a whopping $1.7 billion. His firm, which bought 63 million shares of Snapple in April 1992 in a leveraged buyout and brought the company public that December, made about $900 million from the sale.
With HomeSide, Mr. Lee's firm has another in a long line of winning investments.
"We are very pleased with the price that we and other shareholders received," said Thomas Hagerty, a managing director for Thomas H. Lee & Co.
Sources close to the deal said Mr. Hagerty deserves much of the credit for negotiating with National Australia on behalf of HomeSide's primary owners-BankBoston Corp. and Barnett Banks Inc.-and of NationsBank Corp., which agreed in August to buy Barnett.
In March of last year Thomas H. Lee & Co. paid about $90 million and Madison Dearborn put up about $30 million to create HomeSide by buying BankBoston's mortgage operations. In exchange, BankBoston took a 45% stake in HomeSide, while Thomas H. Lee and Madison Dearborn retained 55%. HomeSide bought Barnett's mortgage servicing operations in May of last year, giving Barnett a one-third stake in the company. After that transaction, BankBoston owned a third of HomeSide and the two venture capital firms owned the remaining third.
HomeSide went public in January at $15 a share. After the offering, Thomas H. Lee & Co. owned about 20% of HomeSide, Madison Dearborn 6%, and the two banks 26% each.
National Australia's deal for HomeSide values the company's shares at $27.825. Thomas H. Lee & Co.'s stake is now worth about $250 million, $160 million more than its initial investment.
Investors were also able to make a nice return on HomeSide's stock.
"The public offering enabled the guy on the street to participate in a Thomas Lee deal," Mr. Cassidy said, noting that in its brief history as a public company, HomeSide's stock has risen almost 80%.
Market observers praised the Thomas H. Lee companyfor merging what had been two midsize mortgage lending operations and turning the new company into one of the largest and most efficient mortgage servicers in the country.
"The whole was worth more than the parts. They took two companies and created big-time shareholder value," one investment banker said.
Mr. Lee's Boston-based firm was able to put the company together because of the relationships it had with both BankBoston and Barnett. In 1995, Thomas H. Lee & Co. and BankBoston formed a venture to buy the mortgage operations of Prudential Insurance Companies of America. Norwest Corp. eventually won the bidding for Prudential Home Mortgage.
And it was easy to bring Barnett into the HomeSide picture, because Mr. Lee's firm was involved in selling subprime lender Equicredit to the bank in 1995.
"We had been looking at the mortgage business for a number of years. We had an investment in Equicredit so we knew the industry," Mr. Hagerty said.
For now, analysts say, all parties involved in the transaction appear to be winners. But National Australia, for its part, must be hoping it doesn't wind up like Quaker Oats.
Quaker Oats bought Snapple when its popularity was peaking and wound up selling the struggling beverage company this year for just $300 million, $1.4 billion less than it paid.