The week of Nov. 3 saw the culmination of months of due diligence come to fruition, as American Capital Strategies closed two deals totaling $90 million.
The larger of the two deals was the $54 million purchase of Flexi-Mat, a Chicago-based manufacturer and marketer of pet bed products.
All debt and equity financing was done in-house, with roughly 67% of the purchase price debt-based, in the form of a revolver, senior term loans and subordinated debt.
Chicago-based intermediary Lincoln Partners contacted American Capital in July, and, according to Tom Gregory, a managing director with American Capital, “The management team wanted a fairly tight group of firms [to bid on Flexi-Mat]. Everyone who attended management presentations submitted offers.” By Labor Day, a letter of intent was signed between American Capital and Flexi-Mat owners.
“Despite the firm holding a significant market share, we think there are some pretty good opportunities to grow,” said Gregory. “Whether it’s through internal growth or add-on acquisitions, we plan to keep the focus on pet bedding products.”
According to the American Pet Products Manufacturing Association, more than 64 million U.S. households own pets, and pet owners spend $7.9 billion annually on pets and supplies, with the pet bed segment raking in roughly $180 million so far this year. From 1998 to 2002, the percentage of dogs and cats sleeping on pet beds has increased 10% and 24%, respectively.
Joseph Elesh, the father of current Flexi-Mat president James Elesh, founded Flexi-Mat in 1948. The company’s beds can be used indoors and outdoors and come with carbon lined fabric to eliminate odors. Flexi-mat products are marketed under the company’s own brand name as well as the private label brands of retailers.
From Pets to Plumbing
About the time Gregory’s team at American Capital was wrapping things up in the Flexi-Mat deal, the firm was signing off on its second buyout of the week, the $35 million purchase of Jones Stephens Corp., a plumbing products company, from Churchill Equity Partners. Headquartered in Moody, Ala., Jones Stephens sells various plumbing products online and through catalogs from a 385,000 square foot warehouse. The company has more than 200 employees, and according to a source close to the deal, has seen 10% growth in each of the past four years.
“The biggest obstacle in doing this deal was the unique aspect of the business model,” said Lindsey Alley, director of M&A for Houlihan, Lokey, Howard & Zukin, the intermediary in the deal. “Its growth rate far surpassed the one or two percent that’s standard for this industry, and we had to convince the buyer that Jones Stephens could continue that growth above the sector average.”
Jones Stephens sells behind-the-wall plumbing products, using a 50-50 mix of U.S.-based and overseas manufacturing companies to make 9,500 products. “Private equity firms love outsourced manufacturing. With no cap-ex, debt can be paid down quickly,” said Alley. After a hotly contested auction that included both strategic and financial suitors Alley said American Capital won “based on the terms and conditions and a high probability of the deal closing.”
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