🔥PE on PE Violence🔥
Conn's Inc., MOD Pizza, Chicken Soup for the Soul, Ambri Inc. + More.
H.I.G. Capital, which manages $64b from its headquarters in sunny-yet-hot-as-hell Miami, at some point in ‘21 thought it would be a good idea to invest in analytics solutions for telecoms, given the increasing complexity of networks.
Or some sh*t.
So in late January of ‘22, H.I.G. Technology Partners (“H.I.G.”) acquired a majority stake in Cupertino, CA-based Mobileum Inc. from Boston-based Audax Management Company, LLC (“Audax”) in a deal valued at $915mm, financing the deal with $285mm cash and the rest in debt. Audax retained a minority stake. But in a suit filed against Audax on March 22, 2023 in Delaware Superior Court (Judge Meghan A. Adams), H.I.G. alleges that the price was waaaaaay too high — inflated by a “fraudulent scheme” to overstate the growth of bookings and revenue.
As H.I.G. tells it, Audax acquired Mobileum in ‘16. Audax supported Mobileum’s acquisition of six competitors. In late ‘20, Audax decided it was time to exit, and retained Jefferies LLC ($JEF, “Jefferies”) to run a sale. Jefferies, for its part, provided H.I.G. with the usual confidential information memorandum (“CIM”). This document indicated Mobileum was “...financially sound and steadily growing. Most pertinent to this case, the CIM projected that Mobileum’s 2021 EBITDA would reach $84 million, its revenue would grow at a rate of 15%, and its bookings would grow at a rate of 18%.”
All a fraud, H.I.G. wails. Mobileum: “...(1) improperly accelerated its revenue recognition by acting as if it had performed more work than it had; (2) covered up its improper revenue acceleration by creating, but not sending, invoices for work that had not been done; and (3) recorded “sham” bookings from artificial entities, knowing that the bookings would not lead to revenue.”
Audax, for its part, dismisses H.I.G.’s allegations with contempt (and launched a countersuit). Mobileum, Audax asserts, was a “smashing success” until H.I.G. waddled in with a boatload of “horrendous” decisions that will be painfully familiar to most anyone who has been on the receiving end of PE dollars. “Without input from Audax or the Board on crucial decisions, and contrary to recommendations from the seasoned executives who had successfully built Mobileum,” H.I.G. pissed off customers by boosting prices, placed unqualified people into executive roles, appointed a CFO who “…had no accounting or operational finance background,” … 😂 … and “…forced senior management to fire the personnel needed to engineer or service Mobileum’s products and created a toxic work environment that led to an exodus of critical executives and engineers.” Customers fled. H.I.G. looked for scapegoats. It undertook an investigation into Mobileum’s revenue recognition practices: “Like a Stalinist show trial, the result of H.I.G.’s investigation was decided before it began, and all to the benefit of H.I.G. and the detriment of Mobileum’s other stakeholders.” In case it’s unclear from the foregoing, Audax vehemently rejects H.I.G.’s allegations and for its part seeks to recover some $100mm in damages it “...has suffered as a natural result of H.I.G.’s bad faith and serial contract breaches.”
We have to admit: we’re enjoying the break away from creditor on creditor violence in bankruptcy so that we can revel in some PE on PE violence out of bankruptcy. On June 27, 2024, Judge Adams decided that most of H.I.G.’s claims against Audax could proceed, denying Audax’s motion to dismiss and setting the stage for an actual fraud trial.*
Color us very, very excited. 🍿🥃
*It wasn’t a complete victory for H.I.G. Judge Adams dismissed claims H.I.G. made against three individual Audax executives.
⏩ One To Watch: Conn's Inc ($CONN)⏩
Yes we know, another big box retailer, 😴. But we can’t cover an EV sh*tco every day.
Conn’s Inc. ($CONN) sells home appliances, furniture, consumer electronics and office supplies. You might’ve seen some of its stores around the southern US:
The stores look something like this …
… which means they look like most other third-rate department stores whose operators seem not to have noticed that many decades have passed since 1987.
Soooo how do you differentiate yourself in an industry rife with competition while selling undifferentiated goods? Payday loans! Or as the company puts it, “in-house consumer credit programs.”