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April 24, 2014
TPG’S SECOND LIEN LOAN + WARRANTS STRUCTURE: LESSONS FOR HIGH-POTENTIAL PRIVATE COMPANIES

Chobani Inc., the fast-growing producer of Greek yogurt, has secured a $750 million financing that highlights an interesting approach to raising capital – one that can be deployed by larger, private companies with the potential to launch an initial public offering.

Chobani is from all appearances an impressively-run company. Founded in 2005 it now boasts sales topping $1.4 billion. The company, based in New Berlin, New York, was a pioneer in the expansion of the US greek yogurt market (though Nielsen reports that its market share has actually backpedalled to ~38% in recent quarters as Yoplait and Dannon have targeted the segment).

Chobani ran a competitive process that apparently involved six leading private equity firms. TPG Capital – which has made a name for itself by branching out from the buyout world into growth equity investments (such as its high-multiple investment in Airbnb”s $500 million equity deal – a transaction valuing the internet “every man an hotelier” firm at $10 billion) – emerged as the leader last month.

TPG intends to use its past investment in Neiman Marcus and a current investment in J. Crew as models for assisting Chobani in its efforts to grow within the US as well as internationally. The capital will help finance the launch of new products, such as a yogurt mixed with steel cut oats.

The transaction had several unique features.

The $750 million is coming in the form of a second line loan ranking below existing bank debt but above the existing equity (which is 100% owned by founder and CEO Mr Hamdi Ulukaya).

Attached to the loan are warrants that will allow for conversion into an equity stake of between 20% and 35% in the event of certain circumstances, most notably an IPO. Chobani is rumoured to be contemplating a public listing as early as next year.  This provides equity upside to TPG whilst preventing immediate dilution for the founding CEO.

The financing is structured so as to not be based on a particular valuation, though those familiar with the negotiations note that Mr Ulukaya values the company at approximately $5 billion or ~4x turnover. The conversion ratio for the warrants is tuned to allow for the company reaching – or indeed failing to reach – certain business targets.

TPG will receive the right to nominate two representatives on Chobani’s board.

Finally, Mr Ulukaya has agreed that Chobani shall hire a new CEO, commencing the search immediately and engaging that individual within a year. Whilst acknowledging the growth to date, TPG is clearly looking to scale up executive resources to allow for the next phase of growth whilst adding depth to the management team.

It is worth noting that the private equity group invested in the face of a lawsuit launched by Ms Ayse Giray, the former wife of the founding CEO. Her lawsuit alleges a right to a majority stake in Chobani. Ms Giray attempted to temporarily block the financing process, but her attempt was denied by the courts.

This loan structure can be deployed by high-potential companies in less volatile industries as a way of funding growth whilst deferring equity dilution until the IPO. At $1.4-1.5 billion in sales, and boasting a high growth rate, Chobani has the scale to generate competition between private equity firms. (Many of thes investors ase increasingly distressed at the high valuations traditional buyout deals command.) The applicability of this structure to smaller companies in Canada is worth noting, as (reflecting the relative sizes of the US and Canadian economies) the IPO threshold here tends to be lower.

Chobani hired an advisory firm to run this process.