Hicks Muse investment written off

Hicks Muse Tate & Furst’s fourth fund has taken another hit, as the firm intends to write off almost half of its $225m investment in Home Interiors.

After an almost eight-year holding period, Dallas-based Hicks Muse Tate & Furst has indicated it will write off the remaining unrealised value of its investment in Home Interiors & Gifts, a Dallas-based home decorative products company. In a letter to LPs, the firm said the write-off would result in a roughly $111 million loss on the firm’s $224.9 million investment.

Highland Capital Management, a Dallas-based hedge fund, took control of the company last month, after it accumulated a majority position in Home Interiors’ outstanding senior and senior subordinated debt. Highland transferred that into equity, giving it a roughly 96 percent stake in the business. The previous shareholders’ interest was minimised to 4 percent, and Hicks Muse will retain a small ongoing stake in the company going forward.

Hicks Muse had held a 66 percent stake in Home Interiors as recently as March of last year, when Home Interiors submitted its latest 10K filing. 

The firm originally invested in Home Interiors in 1998, committing roughly $182 million of equity in an $827.6 million deal, according to the company’s prospectus.

Home Interiors has struggled throughout much of its stay in the Hicks Muse portfolio. According to a report in The Deal, Hicks Muse began acquiring the company’s bank debt in 2001, gaining roughly $94 million worth of debt for around 62 cents on the dollar. When the company restructured its balance sheet later that year, it was speculated in the article that Hicks Muse’s debt position helped it to stave off bankruptcy.

After a turnaround in the company’s performance, the firm reportedly looked into selling Home Interiors in the summer of 2003, but a deal never materialised. Hicks Muse was able to sell a portion of its outstanding preferred stock in 2004 through a $370 million refinancing. According to SEC documents, roughly $139 million of the new facility was used by the company to repurchase the convertible preferred stock.

However, saddled with the extra debt, Home Interiors’ performance plummeted. In a quarterly report dated November 14, 2005, the company indicated that it had incurred losses in five of the previous six quarters, and blamed in part “significant cash debt service requirements” for the struggles.

In the letter to its limited partners, Hicks Muse cited increasing gas prices, in addition to the impact of Hurricanes Katrina and Rita, as contributing added pressure to Home Interiors’ performance.

The firm also noted in the letter that the transfer of ownership to Highland was necessary “to help the company avoid bankruptcy and execute on its long-term business plan”.

The investment in Home Interiors came out of the firm’s fourth fund, which notoriously lost big in the telecom space. The Oregon Public Employees’ Retirement Fund, which publishes its private equity performance data, indicated that as of September of last year, Hicks Muse Fund IV had generated an IRR of negative 8.9 percent.

In its following fund, however, Hicks Muse recommitted to its traditional target sectors, including areas such as energy and food. The firm’s fifth fund has already notched two significant exits, including realisations of Pinnacle Foods and UK directories publisher Yell.

Representatives for Hicks Muse declined comment.