Buying and Selling: MCM Is Geared Up –

After closing its second institutional buyout fund last October, MCM Capital Partners took a brief hiatus from the deal front, focusing instead on its internal game. Now, however, the firm is back in transaction mode and seems to be making up for it time away. The Cleveland-based private equity firm recently completed two back-to-back deals-one new platform acquisition and one exit-the latter resulting in a 46% realized IRR, according to the firm.

And as MCM Director and Principal Steven Ross told Buyouts, there is more to come. “We anticipate closing another platform deal in less than 60 days, which will be our second investment with Fund II [capital],” he said, noting that the firm’s sweet spot-small mid-market companies in the manufacturing and distribution niches-is currently host to a multiplicity of ripe opportunities.

MCM’s Clean Deal

On the buy side MCM Capital Partners acquired Electric Sweeper Service Co. (ESSCO), a wholesaler of vacuum cleaner parts and vacuum cleaners to independent dealers.

“One significant trend is that, despite the Wal-Marts of the world, there are over 10,000 independent vacuum retailers, service centers and repair shops in the U.S.,” Ross said. “It’s a niche that’s not going away. And the OEMs, instead of wanting to deal with every single one of them, have, more and more, been outsourcing their distribution to wholesalers, like ESSCO.” He added that the wholesale vacuum cleaner marketplace is approaching $400 million to $500 million in size.

Additionally, the fragmented nature of ESSCO’s customer base presented its own incentive to invest in the company. The Valley View, Ohio-based wholesaler boasts contracts with OEMs, such as Bissell, Eureka, Hoover, and Panasonic to distribute to more than 3,200 customers, with no single end-user representing more than 3% of the company’s total sales, Ross said. Most of ESSCO’s customers are located in the Midwest and the East Coast.

MCM’s key goal for the investment is to expand ESSCO’s geographic footprint to include Western and Southwestern states beyond the Rocky Mountains (where it has yet to establish operations), as well as a possible northward expansion into Canada. “There are about 15 to 20 other significant wholesalers around the [U.S.] that will lend themselves nicely to ESSCO’s acquisition strategy,” Ross said, adding that when growth by acquisition is not an option, the firm is prepared to “implement a greenfield strategy and build new branches, from the ground up, in California, Nevada,” and other points west “where we see tremendous upside potential.”

MCM’s incentive to reach as many independent vacuum dealers as possible was bolstered by the belief that the market for high-end vacuum cleaners, which ranges anywhere from $200 to over $1,000, is the fastest growing segment of the industry. “When you consider that, you see that there is an incredible opportunity to profit from [vacuum] parts distribution. Nobody is going to throw away an $800 vacuum cleaner because it doesn’t work,” Ross said. “They take them to their local vacuum shops to get them fixed.”

ESSCO is the first acquisition for MCM Capital Partners II LP, which raised $47 million in dry powder before closing last October. Key Bank was the senior lender for the deal.

The firm acquired ESSCO via a Western Reserve-run auction, which Ross said was flooded with interest from like-minded buyout shops-a fact, he said, that betokens the likely exit strategy MCM will pursue down the road. “At the size [ESSCO] is today, it’s already received a ton of market interest from financial buyers… Our goal is to grow it two- to three-fold, so yes, we think another financial buyer would certainly be a likely exit.”

A Well-Fit Exit

Less than two-weeks before the ESSCO buy, MCM bid farewell to MicroGroup Inc., a portfolio company of the firm’s inaugural 1998 fund. Kirtland Capital Partners acquired the manufacturer of miniature machined components in a secondary transaction that garnered MCM a 46% IRR (about 3.5x initial purchase price) on the 38-month investment. The value of the transaction was not disclosed.

Medway, Mass.-based MicroGroup’s chief business is the fabrication and distribution of small-diameter tubing, most of which is used in medical devices, such as catheters used to deliver stints and miniature probes used in various analytical instruments, said Mark Mansour, a managing director and principal at MCM.

The Harris Williams & Co.-run auction for MicroGroup saw “expressions of interest” from about 25 financial sponsors, Mansour said. Anecdotally, the high bidder offered a 35% premium over the low bidder, while Kirtland Capital-which was neither of the above-best understood “the nuances of the company and management team, which signaled to us that they presented the highest probability of close,” Mansour said.

The decision to acquire MicroGroup, in May 2002, was somewhat of a contrarian play for MCM in that macro-trends were negatively affecting the company on two fronts. “Virtually every manufacturer in the U.S. was affected by the economic downturn, and we were not exempt from that,” Mansour said. “Additionally, the during telecom bubble, [MicroGroup] picked up a substantial amount of income (upwards of 5%) form telecom customers. After the bubble burst, all that income was simply not there any more-it just went away.”

“What we didn’t know was if the business would nadir,” he added. “We anticipated sales to slow down for about the next 12 to 18 months after we bought [MicroGroup], and we financed it with that in mind. It was a good bet to make.”

Much of MCM’s role during its ownership of MicroGroup involved shoring up the company’s internal operations while it waited for the storm to pass. This included augmenting MicroGroup’s core management team with new hires, “substantial investments” to update an IT system that dated back to the mid-1980’s and the introduction of an e-commerce capability, Mansour said.

Including this most recent exit, MCM Capital Partners LP, which is still in possession of three platform companies, has generated an aggregate IRR of 32% on its five exited investments, Mansour said.