Is There A Doctor On Board?

By Cathy Booth Thomas/Dallas

When Continental Airlines, one of the most maligned passenger carriers in history, was headed into bankruptcy in 1993, moneyman David Bonderman rushed in with Texas Pacific Group, like a team of trauma surgeons, to give it a $66 million transfusion. A year later, the group pumped in $40 million to save America West. So when US Airways filed for bankruptcy last week, guess who pulled $200 million out of their first-aid kit to help revive the sixth largest U.S. carrier? Bonderman's boys.

Find the sickest company you can, and the odds are good that Texas Pacific wants a hand in healing it--in return for a big ownership stake. After 9/11, few other investors would touch the airlines, which have lost two-thirds of their value in the past year. But ever since the Continental deal--which brought Bonderman and his partners 10 times their original investment--Texas Pacific has made a profitable habit of picking up airlines so far down on their luck that nobody wants them. "We're contrarian by nature," says co-founder Jim Coulter. "On many of our best deals, friends in the business call to say, 'If it wasn't you guys, we'd think it was crazy.'"

If US Airways manages to reorganize under bankruptcy protection, Texas Pacific, based in Fort Worth, stands to own 38% of an airline once valued at $7 billion--all for an investment of $200 million. And that's not its only deal in the works. While public attention naturally attached to the US Airways transaction, Texas Pacific was quietly closing a deal 10 times larger: a $2.26 billion cash buyout of Burger King from Diageo, based in London. Bonderman and his partners are also finalizing the purchase of bankrupt Swissair's catering subsidiary, Gate Gourmet, No. 2 in the world with $2 billion in annual sales.

So who are these guys? Outside the world of leveraged-buyout firms, few know the partners of Texas Pacific--and they like it that way. Even their website is blank. Yet their $10 billion portfolio has included such names as Bally shoes, Beringer wines, Del Monte foods, Ducati motorcycles, J. Crew clothes and Petco stores--as well as Continental Airlines and America West, on whose boards some partners still hold seats.

TPG's greatest strengths, say investment insiders, are patience and timing. Texas Pacific sat out the hottest stock market in history. From May 2000 to September 2001, it did not make one purchase, while unloading more than $2 billion in holdings for its institutional investors. Says Coulter: "Since Sept. 11, there's been a lot more panic, and things have gotten considerably more interesting."

In recent months, troubled airlines from all over the world have been appealing to TPG for help. The partners were most interested, though, when a call came from David Siegel, CEO of US Airways, who had worked at Continental during TPG's turnaround of that carrier. US Airways has valuable East Coast routes and gates and an above-average revenue per seat. But aircraft and labor costs were killing it. Siegel wanted to bring US Airways out of debt without bankruptcy. But TPG, while encouraged by union concessions, was adamant that the airline undergo a thorough restructuring in the courts to write off debt. Texas Pacific is content to wait and work at turning around the airline. "We tend to like complex things. We're problem solvers," says Coulter.

That approach paid off big for Bonderman's first turnaround, Continental Airlines. Thanks to a clever purchasing arrangement, TPG's partnership controlled Continental, though it owned just 14% of its stock. Not just an investor with deep pockets, TPG closely watched costs and CEO Gordon Bethune. Continental's share price, once down around $2, soared to $65 by 1998. "It was a huge gamble with an even larger payoff in an industry where net profits are close to zero," says Continental board member George Parker. After eight years, TPG's total return on its $66 million investment was nearly $700 million.

Bonderman and Coulter learned from the best; they worked for one of the billionaire Bass brothers, Robert, in Fort Worth during the 1980s before opening Texas Pacific with lawyer William Price III in 1993. When European newspapers write about TPG's deals there, they love to run cartoons of the Texas raiders in cowboy hats. But none of the co-founders fell off a watermelon truck. Bonderman, 59, a skilled negotiator, is a Harvard law graduate. Coulter, 42, the savvy stock picker, is a Stanford M.B.A. Price, 46, who figures out how to restructure the distressed firms in which TPG invests, is a Berkeley law grad.

Michael O'Leary, president of Europe's hottest no-frills airline, Ryanair, based in Dublin, got to know Bonderman in 1996 when he "was looking for dumb companies that didn't realize they were on to a good thing. He kind of raped us," says O'Leary, chuckling. "He got 20% for pretty much nothing. Sold us in '97 and made a fortune." The $42 million that Bonderman and his partners invested in Ryanair's initial public offering of stock increased sevenfold.

O'Leary observes that none of Bonderman's riches have gone to his wardrobe: "The guy can't dress himself. Bad suits. Ties don't match. Socks horrendous. Shoes from St. Vincent de Paul. A guy dressed as badly as Bonderman can't tell you how to run your business, can he?"

Actually, he can. Though they are unabashed vultures, Texas Pacific's partners get high grades from airline insiders for their knowledge of the industry and their eye for executive talent. Before any major investment, they walk the halls of the business, checking out employee morale and even the photos on executives' walls. (They prefer folks--like US Airways' Siegel--who show off their families rather than their handshakes with politicians.)

This touchy-feely stuff comes in part from Bonderman, who taught law at Tulane University in New Orleans in the 1960s but reportedly fell out of favor because of his "hippie" clothing and outspoken liberal viewpoints. He is an ardent conservationist, working with the Grand Canyon Trust and the Wilderness Society.

For all their successes, the partners of TPG have had their share of flops. They bought several confectionary businesses, including part of Kraft Foods' candy division for which they paid $200 million in 1995. The candy investment was bankrupt by 1999 because they failed to anticipate a flood of cheap competing products from Mexico. Their attempt to turn catalog clothier J. Crew into a bricks-and-mortar retailer resulted in an identity crisis that has alienated loyal customers.

Bonderman and his partners, however, believe this is prime time for long-term-value investors. "There's a lot of trouble in the world, but it is also a potential time of value," says Coulter. "As investors, we like this environment better than the bubble. It may stay rough for a while, but we're focused five years out." --With reporting by Sally B. Donnelly/ Washington

With reporting by Sally B. Donnelly/ Washington