Dogloo and Opportunity Capital Partners

DOGLOO and OPPORTUNITY CAPITAL PARTNERS
Francesco Paltrinieri  - Student n. 250941181 – Private Equity – 4554

Lewis Byrd, a partner in the private equity firm Opportunity Capital Partners, is dealing with a number of problems that have arisen after the firm’s investment in a doghouse-manufacturing company called Dogloo.

One of the problems that Byrd faces is the misaligned vision he shares with the CEO, Aurelio Barreto, whom he has built a strong relationship and friendship with, seems to care more about product development and marketing compared to financial and organizational controls, making the lead investor unhappy. Additionally, Barreto is surely one of the drivers of the company’s huge sales growth for the past few years: this makes him difficult to replace.
The second problem is the lawsuit against Doskocil, the leader in the pet-products market, which involves the violation of one of Dogloo’s trademarks. This lawsuit is draining more resources than expected and Doskocil could easily outlast Dogloo in case the lawsuit lasts longer than expected.
Furthermore, Dogloo is challenged by an incredible rising demand for its products, inevitably forcing the company to expand its infrastructure. This increase of scale is essential, yet quite difficult, considering the demands for other cash, but the management decided they want to conduct most of the productions in-house and they are willing to do it within a short time frame.

The deal that OCP has struck in 1994 implies a company valuation of around $54 million. In fact, the $750,000 investment by OCC and OCPP combined could be exercisable through the company’s common stock at 1.39%. This investment is part of a $7 million financing, of which $6.25 million of capital is provided by another private equity firm located in Washington, Synenergy Diversified Capital.
The investment has a structure that provides two benefits: the opportunity to convert the debentures into equity of the company, as well as buying a put option that reduces OCP’s risks, thus requiring the company to repurchase any common stock or warrants owned by the PE firm at a price equal to the greater of appraised value or EBT / EBIT multiples (8 and 6 respectively). Nevertheless, a clause in the agreement will reduce OCP’s and OCC’s ownership interest to 0.50% in case of a liquidity event that would result in a valuation of the company greater than $80 million.

In conclusion, if I were Lewis Byrd I would help Barreto raise the additional funds he is looking for, given the potential for the company’s growth and the likely outcome of the lawsuit, but I would try to reach an agreement and set some constraints to what he would be able to do with that money. At the same time, I would suggest syndicating the investment with other possible investors, to reduce risk and even increase the number of exit opportunities.
As Barreto doesn’t seem to realize the financial status of his company is unfavorable, to tackle the first problem, more responsibilities should be given to the CFO, who would have to set constraints regarding cash and future spending in order to achieve more stable financials. In fact, the company has a capable management team but is apparently overcome by Barreto’s influence and his visionary projects.
Moreover, in response to the other issue, Dogloo is expected to win the lawsuit, so in the short term the company should focus on solving this problem. Doing so, it would then be able to use the cash generated from operations to fund the planned capacity expansion by raising additional capital, to meet the increasing demand.