Deals of the Year: Small Market Deal –

Fenway Partners’ $142 million buyout of Panther II Transportation Inc. proves you don’t have to be the highest bidder to win the deal. In spring and early summer of last year, Panther was a hotly contested target, with about eight potential acquirers vying for the company.

Suitors loved that the market for expedited ground freight transportation had grown 8% to 9% over the past five years and is expected to grow at twice that rate over the next five years. They were also attracted to Panther’s business model, especially the fact that it does not own any of the 1,300 cargo vans, trucks and tractor trailers in its fleet. These vehicles are owned by the individual drivers, giving the company more operational flexibility and greater cash flow.

For these reasons, a number of private equity firms were more than willing to open up their wallets for Panther, which is the largest independent provider of ground freight transportation in North America and second only to FedEx Custom Critical overall.

In pursuing the deal, Fenway had a major advantage-it knew the transportation and logistics market inside and out, having closed eight previous deals in the sector. But it had no idea if that institutional knowledge would be enough to win over Panther’s two co-founders-who had very different motivations for selling the business.

After many years in business together, the co-founders decided it was time to go their separate ways. One founder, Dan Sokolowski, planned to remain with the business as CEO. He wanted the acquirer to be a true ally in helping him grow the business. The other partner simply wanted to cash out and was quite content selecting the highest bidder.

Sokolowski, for his part, was very impressed with Fenway. “They asked a lot of smart questions and really wanted to understand the business, while a lot of the other private equity firms were more interested in just writing a check,” he says. “I spent a lot of time with Fenway discussing ideas and vision.”

To further differentiate itself from other investors, Fenway introduced Sokolowski to the management team at Greatwide Logistics Services. Fenway wanted to show it not only had a strong grasp on the transportation sector, but that it could be a good partner as well. Greatwide was proof of that. Since acquiring Greatwide in 2000 for about $175 million, Fenway played an instrumental role in growing the business to its current size of more than $1 billion.

“Greatwide helped demonstrate our credibility and underscored Fenway’s approach to portfolio companies,” says Marc Kramer, managing partner at Fenway. “We have a hands-on model from a strategic and M&A standpoint, but we don’t interfere with how management is guiding the company.”

Sokolowski was convinced Fenway was the right choice. Now it was a matter of convincing his partner as well-even though Fenway’s offer was not the highest. Sokolowski reasoned that the decision should factor in both price and on-going partnership, especially since most of the management team planned to remain with the company. It simply wouldn’t be fair to go with a slash-and-burn shop or one that didn’t know the business, even if they were offering more money, he argued.

After a little nail biting, his partner accepted the logic. The deal closed in June, with Fenway financing the transaction with $60 million in senior debt from GE Antares. The vast majority of the $82 million in equity was funded by Fenway, with minor investments from Sokolowski and several smaller co-investors.

With the ink barely dry on the agreement, Fenway deployed a five-member team to gain a deeper understanding of Panther’s business and build relationships with the management team. In all, the Fenway team spent two full months on site at Panther and continues to have an active on-site presence.

“We spent those first two months figuring out the things we wanted to know before the acquisition but couldn’t,” says Kramer. “It allowed us to assess management and determine where holes needed to be filled and where strengths were underutilized.” In the end, Fenway and Panther came away with a three-year strategic vision for the company and an action plan setting out clear corporate objectives and milestones, as well as accountability for reaching those goals.

One thing Fenway did not factor into the equation was how much the acquisition would re-energize the Panther management team. From June 10, the day the deal closed, to Dec. 31, Panther’s revenue grew 13% from $138 million to $156 million, while earnings skyrocketed 35% from $17.1 million to $23.1 million, according to Kramer. Moreover, Panther’s management team expects earnings to grown organically by another 35% this year.

“We underestimated how productive the management team would become,” says Kramer. “These guys have surpassed all our early expectations. They are very good about communicating their thought processes and are very open with the numbers. The flow of information back and forth has been terrific. We see nothing but more growth ahead.”

The deal has been going so well, Fenway took the opportunity early this year to cash in some of its chips. In January, Panther completed a private placement that allowed the investors to recoup about $47 million, or 53% of their investment. The equity was sold at a total valuation of $192 million, or 1.4x the original purchase price of $142 million, representing a very impressive IRR of 86 percent. Fenway still retains a majority stake in the company.