DEAL MECHANIC: Wise guys

Marcos Rodriguez, founder of Palladium Equity Partners, remembers eating Wise potato chips while he was growing up in Manhattan’s tough Washington Heights neighborhood.

The iconic brand was part of his – and many New Yorker’s – childhood. And when he saw the chance to acquire Wise Foods in 2000 from its corporate parent at the time, Borden, he didn’t hesitate.

“What I loved about the company was it was really an iconic American brand,” Rodriguez tells PEI at the offices of his private equity firm, Palladium Equity Partners, in June. “I’ve been eating Wise potato chips since I was six.”

The company had been founded in 1921 by Earl Wise in rural Berwick, Pennsylvania, who decided to make use of excess potatoes at his delicatessen by frying them up and distributing them in brown paper bags. Four years after making his first chips, Wise opened his first production plant. In the 1960s, the company was taken over by consumer foods conglomerate Borden, and in 2000, was sold to Palladium for about $96 million.

However, the deal quickly went sideways as the Atkins diet craze – which eschews carbohydrates in favour of protein – spread across the country. Potato chips, bread and pasta were out – and Wise, like other purveyors of salty snacks, suffered accordingly.

At the lowest point, Palladium marked its $60 million equity investment in Wise Foods down to $3 million; this was a major blow to Fund II, since Wise was the largest investment in the vehicle, according to a market source. The partners were faced with a difficult decision: was it time to “hand the keys over to the bank and walk away”?

In the end, the firm decided to stick with the investment – but make some big changes. And in December 2012, the famous potato chip maker that had seemed at one point to be a lost cause was sold to Arca Continental, generating a successful 2.7x return.

The success not only benefitted Palladium and its limited partners; the turnaround also helped secure the jobs of close to 1,000 workers at Wise, many of whom are second or even third generation employees at the company. Here’s how Palladium did it.