Francisco Passes Up One Exit Ramp For Another

A year and a half after delisting the company, tech-focused shop Francisco Partners was preparing this spring to return Metrologic Instruments to the public markets. But then a better exit opportunity came along.

Late last month, Francisco Partners agreed to sell the bar-code scanner manufacturer to Honeywell International Inc., a strategic buyer that’s consolidating its position in the automated data retrieval sector. Honeywell paid a rich premium for Metrologic; the $720 million purchase values Metrologic Instruments at 11.5x 2007 EBITDA and nearly 3x 2007 sales, according to a Credit Suisse analyst report.

Francisco Partners wouldn’t reveal its return on the investment in Metrologic Instruments. The San Francisco-based firm led a $400 million buyout of the company in December 2006, kicking in $128 million in equity.

When Honeywell approached Francisco Partners this spring, the firm was conducting a “bake-off” with investment banks to see which one would serve as underwriters for Metrologic Instruments’s imminent IPO. “The offer kind of came out of the woodwork,” said Dipanjan Deb, a partner and Metrologic Instruments director.

In just more than a year of ownership, Francisco Partners effected a rapid overhaul. It swapped out the company’s CEO, outsourced virtually all of its manufacturing to China, and installed a new set of incentives for the sales force. Francisco Partners also sold off an underperforming division Metrologic Instruments had assembled through a series of acquisitions, Deb said.

In addition, the firm halted Metrologic Instruments’s development of radio-frequency identification technology. RFID technology, which involves tiny signal-emitting chips embedded in products to facilitate tracking, is considered a long-term replacement for bar codes. So far, however, the technology hasn’t caught on and has proven to be a drain on research and development budgets and, therefore, balance sheets. The decision to drop RFID development was a “contrarian view,” Deb said, but one that paid off for the company’s short-term profitability.

As a result of these changes, Metrologic Instruments’s EBITDA grew by more than 50 percent during the LBO shop’s hold period.

Francisco Partners also prepared for the exit by overseeing the legal settlement earlier this year of a long-running patent infringement dispute with competitor Symbol Technologies, which is now part of Motorola Inc.

For its part, Honeywell was willing to pay a high price for Metrologic Instruments because the company fits in well with Honeywell’s growing hand-held products division. The multinational is ramping up its activity in the sector, which represents a $16 billion market, according to the Credit Suisse report, and it’s therefore likely that Honeywell will seek bolt-ons for the growing division. In fact, Honeywell could more than double its presence in the market, according to the report.

Metrologic Instruments represented Francisco Partners’s first foray into the bar-code scanning sector. It was joined in the deal by hedge fund Eliott Associates, which was the company’s largest independent shareholder before the buyout, as well as the company’s founding family, which retained a 15 percent stake following the take-private.—J.H.