Bain Capital-owned Varsity Brands is getting its third private equity overlord in a decade, as global investment firm KKR aims to use billions of dollars of new junk-rated debt on the business to buy out existing shareholders.
Varsity Brands—which owns cheerleading giant Varsity Spirit and athletic outfitter BSN Sports—will sell $2.375 billion in new first-tier debt and take $100 million from a new $400 million credit line to help KKR buy out other shareholders, according to ratings notes published this week by Moody’s and S&P Global.
KKR agreed to buy Varsity from Bain earlier this month, according to a person familiar with the situation. Spokespeople for Varsity, KKR and Bain either declined comment or did not respond to email inquiries from Sportico.
Reuters was the first to report on the impending transaction, which it priced at $4.75 billion, according to anonymous sources. KKR’s filings with the Securities and Exchange Commission showed that, as of April, two of its funds had previously given loans totaling $36 million to Varsity.
While ratings agencies have access to corporate financials to form their opinions, most of the figures aren’t disclosed publicly. Both Moody’s and S&P suggest in their notes that Varsity has been losing money. Moody’s said it expects Varsity to generate about $10 million in free cash flow in 2024, up from negative cash flow. S&P says it believes the business can improve to “at least” cash flow break even. Free cash flow is the money a business has left after paying its operating and capital expenditures.
Varsity has endured a tumultuous few years, having been forced to defend itself in multiple lawsuits over antitrust, sexual abuse, trademark and insurance-related claims. The company was originally founded by Jeff Webb in 1974 as the Universal Cheerleaders Association. Since the early 2000s, when it had a brief stint being publicly traded, Varsity underwent a series of mergers and acquisitions, including its 2011 takeover of Herff Jones, the educational product brand, which then merged with BSN Sports in 2013. The following year, Webb sold the newly formed Varsity Brands—including Varsity Spirit, BSN Sports and Herff Jones—to Charlesbank Capital Partners for $1.5 billion, which four years later sold it to Bain for $2.5 billion.
In recent years, Varsity has at times appeared to be the bane of Bain’s existence, with Varsity Spirit being repeatedly accused of operating as an illegal monopoly and harboring a culture of sex abuse in the sport of club cheer.
Varsity’s financial position has worsened over that time, reflected in credit ratings that slipped from B+ nine years ago on S&P’s rating scale to B- in the current transaction. Moody’s gave Varsity a first-time rating of B3 on its scale this week, which similarly considers Varsity Brands a “high-risk” issuer with debt that is not investment grade—otherwise known as junk bonds.
“While we think the transaction is credit positive, we note that it entails higher interest costs, effectively increasing the company’s annual cash interest expense by about $20 million,” S&P said in its note this week. “We also do not believe that Varsity Brands’ new ownership will implement any material changes to its strategy or operating performance over the near term.”
In October, Varsity sold Herff Jones to Atlas Holdings for an undisclosed sum.
Earlier this year, the company settled multiple sex-abuse lawsuits filed by at least 21 plaintiffs, alleging they had been assaulted by their cheer coaches when they were minors. It is not known how much Varsity agreed to pay.
Varsity and Bain have also resolved two antitrust lawsuits filed since 2020—agreeing to pay $82.5 million to a class of “indirect consumers” and $43.5 million to group all-star cheer gyms—while a third suit was dismissed. And yet, the hits have kept coming.
This month, Nfinity, a competitor cheer merchandise company, filed a federal trademark infringement and unfair competition lawsuit against Varsity. Meanwhile, Varsity and several of its insurers are in dispute over who is ultimately on the hook for the sex-abuse settlement payments. Presumably, these legal burdens will soon shift to KKR, once the transaction is finalized. According to Moody’s, that is expected to come by the end of next month.