Allied Soaks Up SunSource Inc. –

Allied Capital Corp., a publicly traded development company based in Washington, D.C., last month agreed to purchase SunSource Inc., a niche distributor based in Philadelphia, for approximately $72 million. Allied Capital agreed to pay approximately $10.38 per share for the company’s outstanding common equity in stock or cash.

“The company is exactly what we’re looking for – someone who really has a defensible market niche and a really good dominant market share,” said Joan Sweeney, the chief operating officer at Allied Capital. “[SunSource] really met that criteria.”

Upon completion of the deal, Allied Capital will own approximately 96% of the company on a diluted basis, and management will retain 6% on a fully diluted basis. The deal will most likely be financed by issuing Allied Capital shares to SunSource shareholders in a stock-for-stock exchange, said Sweeney. However, if necessary, the firm can complete the transaction with internal capital, she added.

The two public companies will be filing a joint proxy statement prospectus with the SEC and will have to go through a review period and proxy solicitation process before the deal can close. Sweeney said Allied Capital hopes to see a close in the third quarter.

Janney Montgomery Scott rendered a fairness opinion for SunSource.

Allied Capital provides both debt and equity for expansion growth, leveraged buyouts and restructurings. During the fourth quarter of last year, Allied Capital made its first investment in SunSource, providing $30 million of subordinated debt to be used as expansion capital.

SunSource is composed of three components: The Hillman Group Inc., which provides keys and key duplicating machinery to hardware stores; SunSource Technology Services (STS), which distributes hydraulic fluid parts to manufacturing lines; and Kar Products, which offers custom inventory manufacturing systems. Kar Products is an equity investment of SunSource. The company recently sold its glass-merchandising segment and is liquidating its integrated supply unit in Mexico.

Once Allied Capital takes an ownership position it plans to look into acquisitions for the company and “really let it flourish in what is a really good position already,” said Sweeney.

Multiple Multiples

According to Yahoo! Finance, SunSource’s trailing twelve month Ebitda is $19.6 million, which would make the purchase price multiple for SunSource 15.2 times Ebitda. However, when asked about the 11.7 times Ebitda multiple, based on trailing twelve month Ebitda of $25.5 million, reported in The Daily Deal, Sweeney said that number was “misleading.”

She explained that the less profitable STS division “masks the profitability” of the stronger Hillman Group and the Kar Products affiliate. Allied Capital is primarily interested in growing the two latter divisions.

“If you boil down all the pieces [of the company], our investment thesis and our investment pricing was basically looking at the divisions that we intend to really push forward, grow and flourish,” said Sweeney.

She added, “If you take the loss of the not-performing-so-well division against the profits of the division that performs well, you can see why we find it very attractive.”

Craig Hille, an associate at Allied Capital, added that under GAAP, a full quarter of earnings was not calculated into the 11.7 times multiple.

Once the firm implements its plans for the company, Sweeney said, the purchase price multiple will look more like six times Ebitda.