Exclusive: Fidelity preserves income with deep cuts Friday, 30 Oct 2009 06:20pm EDT

* Fidelity parent put up $345 mln to back ProBuild

* Invested in building supply co just before housing slump

* Continued acquisitions amid downturn

By Ross Kerber and Aaron Pressman

BOSTON, Nov 5 (Reuters) - Fidelity Investments' controlling Johnson family may run one of the world's largest financial companies, but when it comes to their own investments, the timing has not always worked out so well.

Fidelity's parent, FMR LLC, has spent $345 million over the past six months to cover losses at ProBuild, one of the largest U.S. building materials suppliers, which it built up at the height of the real estate bubble.

Under a recapitalization plan adopted in May, Fidelity could be on the hook for another $105 million through January 2010, according a confidential prospectus for a recent Fidelity debt offering obtained by Reuters.

Losses have been mounting at Denver-based ProBuild, which operates 470 building supply stores and lumber yards.

Revenue this year is expected to total just $3 billion, half of the chain's total revenue in 2006, when Fidelity assembled the company.

Fidelity paid $1.14 billion for Lanoga Corp, which at the time was the third-largest U.S. professional materials dealer, and $548 million for Hope Lumber, an Oklahoma-based supplier of trusses and other wood products.

Since then, the building sector has been decimated by the collapse in residential and commercial construction.

The shares of publicly-traded building supply retailers have plummeted since the end of 2006. Home Depot Inc (HD.N) and Lowe's Cos Inc (LOW.N) have fallen 36 percent each and Builders FirstSource Inc (BLDR.O) is off 79 percent.

Leveraged buyout firm Bain Capital, part of a group that paid $8.5 billion in 2007 for Home Depot's professional supply unit, said in February it was writing down the value of its stake in the deal by 35 percent.

Fidelity's mistimed bet on building seemed reminiscent of its decision to prop up struggling affiliate Colt Telecom Group SA (COLT.L) in 2001, just as the Internet bubble was bursting.

"They have come up short in a number of important investments," said John Bonnanzio, editor of the Fidelity Insight, a Wellesley, Massachusetts, newsletter for investors in Fidelity funds.

Still, those problems may not matter to most Fidelity mutual fund investors, Bonnanzio said. Privately held Fidelity may be comfortable taking the losses as part of a long-term view not dictated by the constraint of quarterly earnings announcements, he added.

Fidelity spokeswoman Anne Crowley declined to discuss the specifics of ProBuild or Colt and said any assessment of the deals should take into consideration the long-term potential for those investments. "We have always encouraged investors to diversify their portfolio and we also diversify our own portfolio," she said.

BUILDING UP THE BUILDING BUSINESS After assembling ProBuild in 2006, Fidelity rounded out the unit with smaller acquisitions in the building materials sector, spending $139 million in 2007 and $160 million in 2008, the debt filing shows.

Forbes.com ranks ProBuild as the 84th largest privately owned business in the United States, based on its 2008 revenue of $4.4 billion and 13,204 employees. Fidelity itself ranks 22nd.

Bond rating agency Standard & Poor's in May cited ProBuild's challenges in the current weak economy as one reason for a negative outlook on FMR as a whole.

"ProBuild generated net losses in each of the past two years and we don't expect it will be profitable in 2009, because of the continuing housing slump," S&P said.

In a recent speech, ProBuild chief executive Paul Hylbert said he expects sales of $3 billion this year, about half of their peak, according to trade journal ProSales.

ProBuild's headcount now stands at over 12,000 workers, down from a peak of 21,500, ProSales reported.

ProBuild and Colt are among a number of businesses managed by FMR's Devonshire Investors division, which is separate from the company's better-known mutual funds. The businesses are owned by Fidelity employees and shareholders through partnership arrangements.

Other units include its BostonCoach limousine company, which has also retrenched amid cutbacks in travel spending by many financial services clients.

In the prospectus Fidelity also noted more problems with its investment in telecommunications unit Colt, which is publicly traded, but whose shares have fallen. Given Colt's financial situation and prospects, Fidelity took an impairment charge of $409 million in first half of this year. (Reporting by Ross Kerber and Aaron Pressman; editing by Ros Krasny and Andre Grenon)