Allied Follows Guiding Light –

Widgets usually denote some hypothetical gadget, and as such the word is most often used as an expression of any mundane business.

But as Washington, D.C.-based business development company Allied Capital has discovered, widgets, or at least keys and fasteners, can provide very real high margins, continuous replacement sales and stability. For this reason, Allied Capital is now acquiring all the outstanding common equity of SunSource Inc., valued at $72 million. Allied Capital first invested $30 million in mezzanine capital in SunSource in December 2000.

SunSource has two principal businesses, but it is The Hillman Group Inc. that interests Allied Capital. The Hillman Group supplies hardware stores and mass merchants with fasteners, keys and key duplication systems.

“We like companies in less cyclical industries with a dominant market position,” said Bill Walton, chairman and CEO of Allied Capital while explaining his decision to acquire the outstanding common equity of SunSource.

At press time, Allied was on the verge of selling the company’s two industrial divisions: SunSource Technology Services (STS) and Kar Products.

SunSource has $450 million in sales, said Dan Russell, a principal at Allied Capital. STS represents $200 million of that, but it’s the retail side of the business that Allied intends to expand.

“These products are ideal for us,” Walton said. “We have four companies in the pet products business that are similar: small ticket items in less cyclical businesses.”

It is for this latter reason Walton believes SunSource “won’t be hit much” by the economic downturn. “These are among the businesses least affected through [business] cycles,” he said, adding that his firm “is very well-positioned to support [portfolio] companies because we’ve got a $1.3 billion permanent equity cap and $2.2 billion total cap.

“We don’t have external pressures to liquidate early to show high IRR. We’re content to hold onto a company forever,” he said.

Allied Capital is publicly traded and has raised $900 million over 36 months. The company has a 9% dividend yield, said Walton, “a very healthy return compared to the S&P 500, to Nasdaq, or any index.”

With SunSource, Allied plans on helping management make operational improvements, including the restructuring of its distribution centers and investing in IT. Hillman had $45 million in Ebitda in 2001, said Russell, and Allied will have 5.5 times Ebitda after it divests the industrial divisions.

Following completion of the transaction, SunSource will operate as a privately owned portfolio company controlled by Allied Capital with SunSource management participating with Allied in the buyout transaction.