Berkshire Cashes In On Consumer Product Play –

Eight years is a long time for any investment. Although when that investment returns more than five times equity, it can help keep limited partners from becoming too impatient.

When Berkshire Partners acquired The Holmes Group through a 1997 recapitalization, it didn’t appear this would be an almost decade-long job. The company had already established itself as a leader in the fan space, manufacturing operations in China had been established, and just a couple years following Berkshire’s investment, the Holmes Group expanded its product line and nearly doubled its revenue with the acquisition of the Rival Co.

Things were looking up, and then came Y2K, the much hyped, and in most cases harmless, threat that was supposed to render older computer systems useless. While most businesses survived without any disruption, there were an unlucky few that got muddled in Y2K-related confusion.

“In the [Holmes/Rival] merger, it appeared that Rival had an IT system that was Y2K compliant, so we merged the two systems onto the Rival platform,” Berkshire Managing Director Richard Lubin said. “As it turned out, their platform wasn’t sufficient… There was a period when we weren’t quite sure what was happening from a data and informational standpoint… So we spent a lot of time dealing with the fallout from that. We missed a beat from our initial plans, but we were able to straighten things out through a lot of hard work.”

When Berkshire first invested in Holmes Group in 1997 the firm was able to gain control of the company with a $22 million investment. As part of the merger with Rival, Berkshire invested another $45 million into the company.

Outside of the Y2K difficulties, the Berkshire investment went according to plan. The firm had anticipated that the consolidation among retailers would result in a subsequent consolidation of the consumer product manufacturers. Between the manufacturing presence in China and the merger of Rival, Holmes was able to stay ahead of the curve by reigning in its manufacturing costs and bolstering its presence in end markets. The Rival purchase also allowed Holmes to resuscitate Rival’s product offerings and make the combined business even more efficient in sourcing its products from China.

“The Y2K issues set us back somewhat, but the reasons for the acquisition ultimately proved to be correct, Lubin said. “We believed that this was an industry that was going to grow through consolidation, and we saw Holmes as a consolidator.”

With this in mind, the company had started conversations with the struggling American Home Inc. about a possible acquisition of its Sunbeam home appliance business. That unit, along with the rest of AHI, ultimately went to Jarden Corp. in an $845 million acquisition late last year, and Holmes then turned its attention to Jarden to see if it was interested in divesting the Sunbeam division.

While those discussions didn’t result in a divestiture, they did lead to the sale of Holmes to Jarden, which gave Berkshire its exit.

“We went to Jarden thinking that they might be interested in spinning off the Sunbeam business, but that wasn’t something they were interested in doing. Instead they wanted to know if we were interested in selling Holmes. Our reaction after looking over the deal was that we believed in the combination of the two companies,” Lubin said.

He added that Holmes will be able to give Jarden a sourcing presence in China, and that the products of the two businesses mesh very well, with very little overlap between the two.

Jarden is paying $625 million for the business, including the assumption of debt. Two-thirds of the purchase price will be paid in cash, with the balance taking the form of Jarden stock.

Including a dividend recap last year, Berkshire is making 5x its investment, and going forward will hold a roughly 9% stake in the combined company. The investment in Holmes came out of Berkshire funds IV and V.

Berkshire is not the only PE group to make a play in the consumer product consolidation. Through Jarden Corp. alone, Warburg Pincus made a $350 million investment in the company in September to help facilitate its acquisition of Mr. Coffee, while Sun Capital Partners was able to grab control of AHI’s Coleman Powermate unit when Jarden took over its parent.