Carousel, Halifax Unload Meineke –

The advent of the automobile was great for the economy, unless of course one considers the plight of the buggy whip manufacturers. The stainless steel muffler has had the same effect on the muffler specialists, although not as acute, and companies such as Meineke and Midas have had to scramble to adjust. Business hasn’t completely dried up, but mufflers-if your business is repairing mufflers-are no longer as reliable as they used to be.

Nobody wants to invest in the next sector to go extinct, but some investors will take a contrarion view and find an opportunity to help a company transition itself to avoid oblivion. This is what Carousel Capital and the Halifax Group were thinking when the pair acquired Meineke and used it as an opportunity to help the company evolve from muffler shop to auto center.

The buying group was able to acquire the business at a relative bargain, buying the business in 2003 from Brambles Industries, which was itself going through a realignment. The team paid just $68.5 million for the company, or 6.2x EBITA. Market watchers at the time expressed initial surprise at the low valuation, but the consensus reasoned it was just a low price for a company with limited upside.

The investors wasted no time after acquiring the company to rebuild its image and its products. “We were able to reposition the brand to emphasize the other service offerings,” Carousel Partner Bill Hobbs told Buyouts. “It used to be when you think Meineke,’ you think, mufflers.’ There had never been a lot of emphasis on the other services such as brakes, struts and other services.”

Changing Meineke’s name from “Meineke Muffler” to “Meineke Car Care Center” was more than just semantics. As a muffler specialist the company was chasing a declining customer base, but as a complete auto care provider, the demographic trends flip around, and the business now plays into the overall auto care market, which is growing alongside the number of cars in operation. According to reports, there are an estimated 140 million autos running on U.S. roads, which outpaces the number of people that possess U.S. drivers’ licenses.

When the investor group acquired the business it last reported EBITA of $11 million on sales of $35 million. Hobbs couldn’t comment on Meineke’s performance other than to say it’s shown “tremendous growth,” during the group’s ownership.

Because of the expansion, the investors were able to take out a dividend equaling roughly half of its invested capital in a recapitalization enacted eight months after the acquisition. This past June, 14 months after the recap and a little less than two years after its investment, Carousel and Halifax were able to exit Meineke through a $127 million sale to Allied Capital.

Hobbs said the sale cemented a more than 3x return on equity for the investor group and yielded an IRR of greater than 100 percent.

Allied’s investment in Meineke is made up of non-voting common equity, senior debt, second lien debt, and subordinated notes. Management, which invested alongside Carousel and Halifax, also rolled over its equity position in the new deal.