(Reuters) - Warren Buffett's Berkshire Hathaway Inc (BRKa.N) said it would buy Oriental Trading Co, a toy and party supplies company that is partially owned by private equity firm KKR & Co LP (KKR.N), for an undisclosed sum.
The deal ends a period of instability for the Omaha, Nebraska-based maker of merchandise ranging from pink flamingos and wedding favors to Halloween decorations and beading supplies, in which it underwent bankruptcy and was passed around by private equity firms.
Berkshire will pay around $500 million for the company after an earlier auction did not yield satisfactory bids, according to two people close to the deal.
In mid-October, Oriental Trading Chief Financial Officer and Chief Operating Officer Steve Mendlik e-mailed Berkshire Hathaway Chief Financial Officer Marc Hamburg, who Mendlik had met previously, CEO Sam Taylor told Reuters in an interview.
Two hours later, Mendlik got a phone call from Buffett. The two spoke for around 10 minutes before Buffett said he was interested in taking a look at the company and wanted to see its financials.
Just a few days later, Taylor and other members of Oriental Trading management met with Buffett for about two hours.
The company then offered itself for sale at a price Buffett accepted.
"He was very warm and down to earth," Taylor said. "It was a surreal experience. I was sitting on the couch pinching myself saying 'I can't believe I'm talking to Warren Buffett.'"
Oriental Trading's strong cash flow, customer loyalty and high core profit margins made the business attractive to Buffett, Taylor said.
Not to mention the fact that Buffett, who hails from Omaha, is a fan of his hometown, Taylor said.
Oriental Trading, which filed for Chapter 11 bankruptcy protection in August 2010, is owned by more than a dozen financial institutions, including KKR.
"Over the past two years the company has transitioned to steady growth, both top and bottom line, and there is no question the company has a bright future as part of the Berkshire Hathaway enterprise," Jeremiah Lane, a director in KKR's special situations team, said in a statement.
In 2006, Carlyle Group LP (CG.O) purchased most of Oriental Trading for more than $1 billion from private equity firm Brentwood Associates. Saddled with debt, the company filed for bankruptcy in August 2010, allowing creditors to take over.
Although the company's earnings before interest, tax depreciation and amortization (EBITDA) only fell by a third from peak to trough because of higher bulk mail costs and the recession, that was enough to cripple it due to its high debt load, one of the people said.
Carlyle had leveraged the company at 7.5 times its EBITDA, resulting in it breaching debt covenants and eventually going through a debt restructuring. KKR, which bought a third of the company's $400 million bank debt and got 55 cents on the dollar during the restructuring, stands to make two times its money due to Buffett's acquisition, the person added.
A year and a half after Oriental Trading emerged from bankruptcy, investors were looking for an exit. Reuters reported in August that Oriental Trading was up for sale in a deal that could fetch about $500 million.
"For us and our employees this is huge," Taylor said. "It's a permanent home for Oriental Trading so we can get off the private equity treadmill and not have to deal with uncertainty about who is going to be the owner."
The deal is expected to close by the end of November. Oriental Trading was advised by Lazard Middle Market.
Founded in 1932, Oriental Trading sells more than 40,000 products, ranging from Halloween decorations to teaching supplies and novelty toys.
Oriental Trading is one of several recent deals for party and crafts-supply companies.
Party City Holdings Inc was purchased by private equity firm Thomas H. Lee Partners in June for $2.69 billion.
Crafts retailer Michaels Stores Inc filed for a $500 million initial public offering in March, although those plans are currently on hold, according to sources familiar with the matter.
(Reporting by Olivia Oran and Greg Roumeliotis in New York and Vrinda Manocha in Bangalore; Editing by Sreejiraj Eluvangal; Grant McCool and; Peter Galloway)