The owners of 49.9% of Builders FirstSource (BFS) proposed today a recapitalization of America's eighth-biggest LBM operation in which common stock, rights to buy future shares, and new IOUs would replace existing debt. BFS' management responded by announcing it has formed a special committee comprised of independent and disinterested directors to evaluate the proposal. BFS gave no timeline for when the committee would report its findings.

The proposal sent to Floyd Sherman, BFS' president and CEO, was made by the JLL Partners and Warburg Pincus private equity firms. Together the two operations own just under half of BFS' shares and $98 million of its roughly $319 million in long-term debt, and hold six of the 10 seats on BFS' governing board.

"Notwithstanding your efforts to minimize the company's operational cash burn, the severity and duration of this downturn is taxing the company's financial resources," Paul Levy of JLL Partners and Kevin Kruse of Warburg Pincus wrote to Sherman. On July 23, BFS reported a second-quarter net loss had fallen by nearly half, to $22.6 million, on a 37.8% drop in sales to $175.5 million. The company did that in part by reducing its selling, general and administrative expenses 32.3% to $24 million.The Dallas-based dealer also said it had closed its Ohio operations. It operates mainly from Texas through to the mid-Atlantic states.

"As significant stakeholders of the company, we are concerned about the company's liquidity as this downturn extends into the second half of 2009 and into 2010," the letter continued. "We believe that the company needs to raise more capital to preserve financial flexibility and pre-empt any issues associated with a lack of liquidity."

Consequently, the equity firms proposed:

  • A rights issue (giving investors the right to buy shares at a future date) of $2 per share, intended to raise $75 million. JLL and Warburg would backstop the offering.
  • Exchanging the debt notes held by JLL and Warburg for common stock worth $2 per share.
  • Offering to exchange at least 85% of the remaining notes, broken into $1,000 increments, into either new notes paying LIBOR plus 7.5 percentage points and due in 2017, or in equity worth $2 per share, or any combination of the two so long as between $20 million and $40 million of new common stock gets issued.

The bulk of BFS' current long-term debt consists of a $275 million second priority senior secured note issued in 2005 and due in 2012. Its rate floats quarterly and is based on LIBOR plus 4.25 percentage points.
The transactions would cut BFS' total debt by $150 million to $172 million and raise about $75 million in cash, JLL and Warburg said. They proposed that a special committee of independent directors be appointed to review and negotiate the proposal.

JLL, which formed BFS in 1988, and Warburg, which began putting money into the dealer in 2006, have seen their investments rise and fall dramatically in recent years. In the first quarter of 2007, BFS stock traded for as much as $19.88 per share. By the fourth quarter of 2008, it was down to 82 cents a share. On Monday, Aug. 31, it closed at $7.64.

In their letter, JLL and Warburg said they expected their plan would increase the number of shares outstanding--currently 36.1 million--by about 10%. They stressed that they "are committed to remain substantial investors in the company and are not interested in selling our shares at this time, including as part of any change in control transaction."

BFS stood at No. 8 on the 2009 ProSales 100 with sales last year of $1.04 billion. Its 33.7% drop in sales from 2007 was the eighth-worst on the entire ProSales 100.