Nothing came easy to private equity investors last year. Deals took longer to negotiate and close, money was harder to raise, debt financing became almost impossible to secure, and deals were harder to exit. Indeed, Venture Economics’ Private Equity Performance Index shows the preliminary one-year return for private equity at -11.3%, declining further from last quarter’s one-year return of -8.2%. And yet, firms that not only exited but also exited big in 2001, deserve to be commended. One such firm, Clayton, Dubilier & Rice managed to exit its investment in Alliant Exchange Inc., earning it Buyouts’ best exit of the year.
The deal was not expected to close until sometime this quarter. But by the end of the November, Royal Ahold NV, one of the world’s largest owners of supermarkets, had acquired Alliant Exchange for a whopping $2.2 billion from CD&R. The sale brought CD&R a return of more than six times its original cash investment in Alliant as well as an internal rate of return of more than 30%.
CD&R acquired Alliant Exchange from Philip Morris in 1995 for $690 million, including a $200 million equity investment from the firm. Under CD&R’s ownership, Alliant’s revenue increased by more than 60% and the company became the No. 3 national food distributor in the country. Additionally, sales reached $6.6 billion, giving it a cash flow of more than $170 million.
When CD&R bought into Alliant, the Deerfield, Ill.-based food distributor was treading water. “There was room for improvement,” says Donald Gogel, CD&R’s chief executive. As Gogel describes it, Alliant was a relatively young company that was seeing some revenue but wasn’t working to its full potential. He felt Alliant could be using technology better and selling more exclusive brand products.
CD&R helped Alliant increase its private label sales 40% by bringing the label into hotels, schools and restaurants. “Rather than selling tomato sauce with a brand name, you package it yourself, like a Stop & Shop brand. If the quality matches the name-brand product, and cost is lower, it works. And the ultimate customer never knows the difference,” says Gogel, adding that CD&R was also able to expand sales of Alliant’s own name brand in the health-care industry. “We lead the market share in the hospital industry. That became huge for us, so big that it was our fastest growing segment by far.”
Under Jim Rogers, a principal at CD&R, who came in as the chairman of Alliant two years ago, Alliant started using technology more efficiently. By the third year of CD&R’s run with Alliant, every sales agent on the force had a laptop, making the time delay in order entry basically non-existent. CD&R also implemented a system for Web ordering. “We are still the leader in Web-based ordering. We pioneered Web-based ordering. Our larger customers, but really anyone, could go online if they needed to replenish their stock,” explains Gogel, who still refers to Alliant as “we.”
However, despite all the new systems CD&R put in place, Gogel thinks the high standards that CD&R insisted upon really made Alliant a winner. “In order to succeed, you have to set a performance culture – we strived to please our customers. We were on time with our delivery fulfillment 99.8% of the time. It is very effective when you do the basic things right. That’s how you gain customer loyalty and get more orders,” Gogel says.
While the business is on target now, Gogel says it took seven years to exit, and that the roughest period came between 1998 and 2000. “Everyone was working hard but couldn’t bring it to the bottom line. It was like we were taking one step forward then one step back. It took an extra level of discipline,” he says, crediting Rogers with giving Alliant what it needed to break the threshold.
After Alliant was performing at an optimal level for more than a year, CD&R was ready to exit, despite the poor market conditions. CD&R had added difficulties. Although Ahold, based in Amsterdam, had been looking to beef up its U.S. food-service business, there were anti-trust issues that had to be dealt with during the negotiations, and Ahold was also in the middle of acquiring Bruno’s Supermarkets Inc., a food retailer based in Birmingham, Ala., for $550 million.
“The deal was managed professionally by both sides but it wasn’t easy. We had to make sure there was no reason for any antitrust laws to get in the way and because Ahold was buying Bruno’s at the same time it was uncertain that this deal would really go through. In the end the exit went how it was supposed to go, but there were a lot of zigs and zags,” Gogel says.
The acquisition of Alliant, which will be combined with Ahold’s U.S. food service business, will add 17 large U.S. cities to the company’s current service range. The deal is expected to significantly boost Ahold’s No. 2 position in the U.S. food-service-distribution market, helping the company better compete against Sysco Corp, the Houston-based No. 1 food-service distributor in the U.S. Ahold is best known in the U.S. for owning Stop & Shop, Tops Market and Giant-Carlisle.
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