Arsenal Capital recently announced its buyout of Genicom, a printing machinery manufacturer and distributor, from Sun Capital Partners for approximately $40 million. The deal was Arsenal’s third buyout of 2002.
According to Terry Mullen, managing director and co-founder of Arsenal, the debt-to-equity ratio for this leveraged buyout is a 60/40 split. “We tend to over-equitize our transactions,” he said. “Our goal is to spend our capital investing in improvements that significantly enhance cash flow and growth.”
Last year Arsenal – a New York-based private equity firm founded in 2000 – also closed on Interdynamics, a car-parts company acquired for $45 million; and a label division of Mail-Well, a printing company that cost Arsenal $80 million. The debt-to-equity ratio for each of these two firms was identical, with a 55/45 split.
“We used only senior debt [on these three deals],” said Mullen. “We considered other forms of debt, but have not yet seen the need to go down that road. We think our ability to attract firms willing to put up senior debt in this stingy market is a testament to the quality of these companies.”
Combined with Arsenal’s additional two deals closed in 2002, the average multiple for its deals is 3.8 times EBITDA, “which is substantial, considering the average EBITDA in this sector is 6.4 [times],” Mullen said.
Arsenal utilized its Arsenal Capital Partners LP fund, launched in May 2001, to pay for the acquisition. With a target of $250 million, and $100 million already raised, the firm plans to close the fund sometime this year. Investors in the fund include Citicorp; TPM America, the $4 billion investment arm for Prudential (in the U.K.); and Jackson National Life.
The deal materialized when Genicom contacted Harris Williams, the Richmond, Va.-based investment bank. The bank ran a limited auction process, according to Mullen, and he credits Arsenal’s half-dozen operational employees-senior operators coming from Allied Signal/Honeywell, General Electric, Dupont and General Motors-as an important factor in closing the deal. “Sixty percent of our deal flow generates through our operational staff,” said Mullen.
Genicom manufactures and distributes printing machinery and solutions in specialty markets, providing its products to Chrysler, SBC, Bell South and Wal-Mart. “These companies have specific needs,” Mullen explained. “Our customers need high speed printers that can operate in rugged, warehouse environments, but they do not need the sophisticated laser-technology included in office-style printers, which can be 100 times the cost of our equipment.”
In the early 1990s, Genicom was the darling of GE, generating over $300 million in annual sales. But poor choices in choosing sectors to expand into caused the company to falter, which in turn caught the attention of Sun Capital. “Once they successfully righted the ship, we were the natural next step on the food chain,” Mullen said.
Mullen spent the 1990s at Thomas H. Lee, pursuing high-rate growth businesses and closing on deals including Snapple, Ray-O-Vac and First Alert.
Arsenal, as it does with most of its acquisitions, plans to stick with existing management, “which is a big reason why we purchased the company,” said Mullen.