1) Having closed three control-stake deals in the third quarter, Wynnchurch Capital was among the most acquisitive firms of the three-month period. What was driving that level of activity?
As a value buyer, we focus on underperforming, distressed, complex and special situations. The combination of several quarters of economic downturn, overleveraged balance sheets, and lenders that have little risk tolerance and no immediate recovery in sight is forcing many companies to seek bankruptcy protection. Meantime, illiquid credit markets, with limited DIP availability, is forcing many properties directly into Section 363 asset sales, which is how we made our most recent purchases. Most PE firms are not experienced in or comfortable with buying companies out of bankruptcy, but this is part of the Wynnchurch investment model.
2) In July, Wynnchurch acquired the assets of Sencorp, a bankrupt manufacturer of fastening tools, and formed a new platform company called Senco Brands Inc. What are the benefits of these types of bankruptcy deals?
The benefits in acquiring assets out of bankruptcy are significant: buying at extraordinary asset values (many at near liquidation prices), being able to reject unfavorable contracts and leases, acquiring only selected assets of the business and assuming no liabilities. But to be clear, bankruptcies also may present significant challenges, such as disruptions in the customer base, supply chain, manufacturing operations, management team, and other components of a business. Such deals require a great amount of troubled situation experience, process orientation and decisiveness.
3) What is Wynnchurch’s strategy for 2010, and how will it differ from what you’ve done in 2009?
Our strategy will be the same in 2010 and beyond: identify fundamentally well-positioned companies that have been undermanaged or overleveraged, that can benefit from operational improvements and strategy fixes. And, equally as important, we need the right management team in place to drive disciplined processes and accountability throughout the organization.
4) A number of your investments are in sectors related to industrial and manufacturing. How would you classify the state of those markets from an investor’s point of view?
Most industrial manufacturing companies have gone through the worst cyclical downturn any of them has ever seen. In not “wasting a crisis,” as our current administration has often proffered, the better led and positioned companies are making extraordinary changes to their cost structures. The operating leverage benefits that will accrue from these cost and productivity actions will drive rapid profit growth once volumes return. The next two to three years will likely prove to be the best time in our careers to buy industry leading businesses at such depressed values.
5) Wynnchurch’s focus includes manufacturing, distribution, logistics, and energy and business services. If you could add any other industry segment to that list, what would it be, and why?
I would not add another segment. It is critically important for us to be focused on what we do well and maintain our investment discipline: buying market leaders at good values, with little leverage, and bringing change to the operations. There are plenty of opportunities right where we are and the dislocation in credit markets will only add to this. Our pipeline of potential deals has grown exponentially over the last six months and we are overwhelmed with interesting deals.
Edited for clarity