Deals of the Year: Best Exit –

In the face of a languishing stock market, a slow economy, and a dearth of corporate buyers, exiting investments proved a daunting task in 2002. Yet somehow, Trivest made its exit from Aero Products International seem as easy as inflating one of the company’s air mattresses.

Miami-based Trivest sold the “as seen on TV” inflatable mattress company to Investcorp in November 2002 for $231.5 million. The sale came just 17 months after Trivest acquired Aero from Fidelitone Distribution Services in June 2001 for $86 million, in which it invested $29.5 million of equity.

The math for Trivest is anything but fuzzy. That $29.55 million initial investment turned into $186.261 million, after paying off certain debt and transaction expenses. That resulted in a multiple of 6.3 times Trivest’s original equity investment and an IRR of 228 percent-hardly representative of the depressed economic environment.

The final sale price carried multiples of over 7 times EBITDA and 2 times sales, versus multiples of approximately 5 and 1.2 times for EBITDA and sales, respectively, when Trivest first bought the company.

To be sure, Aero was no slouch when Trivest bought it. The company had a phenomenal year in 1999, as earnings grew 103 percent. But by 2000, the company was slowing down, as EBITDA came in just 11% higher at the end of that year.

“When we acquired the company we saw that its growth rates were beginning to slow down,” said Trivest Senior Managing Director Troy Templeton. “However, we believed that we could reenergize the growth through numerous opportunities in the retail markets and invest in an advertising campaign that would further build the awareness of the brand.”

In building the Aero brand, Trivest reinvested $15 million of profits into advertising, switching to one- and two-minute length commercials from the 30-minute infomercials that had been used to first usher in the Aero brand in 1999. The prime-time slotting of Aero commercials complemented the firm’s efforts to boost Aero’s presence in the retail arenas, instead of relying solely on direct sales through the late-night infomercials. “We wanted to reduce dependence on direct sales and make Aero a true enduring consumer brand,” Trivest Director Jamie Elias added.

Trivest next focused on getting Aero’s products into the retail stores. Under Trivest’s watch, the company lined up contracts to sell its products in a number of new retail locations, including J.C. Penney, Dillard’s, Sports Authority, Kohl’s, Costco and Kmart. And unlike others who sold to Kmart, Aero did not get embroiled in the retailer’s financial troubles. “We sold to them on a direct import basis. They bought the products up front,” Templeton noted.

Most retailers were happy to climb on board, as the Aero products provided them with big-ticket items that did not take up a lot of space. The retailers were also happy that in spite of the economic downturn, customers still lined up to buy the products. On a same-store basis, Aero saw steady increases in its sales, even as the rest of the retail world suffered through a widespread slump. “One of the challenges we had was the retail environment,” Templeton said. “Aero’s strong growth during that time, shows the power of the Aero brand.”

Also during Trivest’s ownership, the firm bolstered the management team, added a fully functioning accounting and IT department, and provided broad employee stock ownership. The firm also supported Aero’s launch of number of new products and its entrance into new markets. Templeton was quick to credit Aero’s management for the company’s rapid growth and strong financial results. He also noted that with their own equity investment and other incentive plans that were in place during Trivest’s ownership, the management team realized over 10 times their equity investment.

And what about Aero? Earnings surged during its tenure in Trivest’s portfolio. In April 2001, the month before Trivest acquired the company, Aero posted 12-month trailing EBITDA of approximately $16.5 million and sales of $75 million. In November 2002, the month its sale to Investcorp closed, Aero’s earnings and sales had jumped over 80% and 40%, respectively, with 12-month trailing EBITDA of over $30 million, on revenues of more than $105 million. Furthermore, during Trivest’s ownership, Aero was able to pay down over $24 million of debt.

With Aero’s tremendous growth, why not wait another year and exit for even more money? For one, like other funds, Trivest wanted to distribute money back to its limited partners. More importantly, it’s always better to sell an asset when it still has some upside left.

“We wanted to sell while there was plenty of growth left and the company was still early in its growth curve,” Templeton said. “We had several plans, and Aero exceeded all of them.”

Trivest’s initial plan was to hold onto the company for five years, aiming for an IRR of over 30 percent. With the company’s rapid growth, Trivest contacted CIBC World Markets, its lead lender when it acquired Aero, and hired the bank to arrange a sale of the company. While there was also interest on Wall Street to float Aero in an IPO, Trivest decided to forego that option, and instead move forward with a sale, which would allow it to get a full exit.

“We got a tremendous initial reception [to the auction], primarily from the larger financial sponsors,” said Bruce McCarthy, who heads M&A at CIBC. The auction drew initial interest from over 25 different parties, while CIBC’s commitment to provide stapled financing to the eventual buyer also helped draw interest.

Templeton said there’s significant growth left in the company. Just prior to the sale to Investcorp, Aero had worked out a distribution agreement with Wal-Mart, and the economy is still at the bottom end of the cycle, so there is still plenty of growth to be realized. Templeton even forecasts that a few years down the road, Aero could post annual revenues of around $300 million to $400 million.