Genstar Buys Panolam: Take Two –

After almost a six-year hiatus, Panolam Industries International Inc. is once again a portfolio company of Genstar Capital LLC. In a $345 million (nearly 6.4x Panolam’s EBITDA) transaction that closed earlier this month, the San Francisco-based private equity firm-along with Houston, Texas-based Sterling Group-reacquired the decorative laminate panel manufacturer from the Carlyle Group. Carlyle, meanwhile, acquired Panolam from Genstar in November 1999 in a $402 million secondary transaction.

Panolam designs and manufactures decorative laminate panels for cabinets, countertops, display cases and restaurant furniture that serve as economical substitutes for natural surfacing materials such as wood, stone and ceramic. The company, with five manufacturing facilities and three distribution centers, brings in about $280 million in revenues, and estimates that its total 2005 EBITDA will weigh in at about $54 million.

Genstar’s first encounter with Panolam was in 1996, when it acquired the Shelton, Conn.-based company for about $90 million. At the time, Panolam was an underperforming company that Genstar was able to rev back up, in short, by placing Bob Muller in the role of chairman, president and CEO, and by executing the $175 million add-on of Pioneer Plastics Corp.

However, after its 1999 sale to Carlyle, “Panolam was hit with a series of exogenous events that took basically took the wind out of its sales,” said J.P. Conte, chairman and managing director of Genstar Capital. These events included the terrorist attacks of Sept. 11, 2001 and the subsequent economic recession; a severe decline in revenues from the airline industry; and the loss of Panolam’s biggest customer, The Rugby Group.

But part of the allure of reacquiring Panolam, Conte said, is that it faired through that economic storm far better than its competitors. For instance, Formica-probably the most recognized name in the decorative laminate industry-filed for Chapter 11 bankruptcy protection in 2002 and only emerged in June 2004. Formica is owned by Cerberus Capital Management and Oaktree Capital Management.

The overall decorative overlay market is an $8.5 billion industry, and according to Conte, Panolam is making headway and taking market share from its weakened competitors.

“We’re not trying to relive an old dream since we once had a great experience [with Panolam],” Conte said. “In ’96 the company offered us opportunity if it could be put back on the right track…This time, the growth will be a function of the economy and how strong nonresidential construction is, which for the foreseeable future.”

The trend of substituting laminate panels for natural ones is a simple matter of economics in that synthetic panels can cost one-third to one-half of what “the real thing” costs, Conte said. He added that in addition to taking advantage of organic market growth, Panolam will also seek out small, niche add-ons to expand into new markets.

Even though the Carlyle Group sold Panolam for less than it bought it for, the firm is still making a profit, partly due to a $225 million refinancing in late 2004 that reportedly allowed the Washington, D.C.-based firm to extract an approximated $70 million dividend.

The new buyers turned to Credit Suisse First Boston and Jefferies & Co. to finance the acquisition with $150 million in high yield debt and a $135 million senior term loan. Genstar and Sterling split the equity portion of the deal 50%/50% between Genstar Capital Partners IV LP, which closed in 2004 with $475 million, and Sterling Group Partners II LP, a vintage-2004 vehicle that closed on $470 million in limited partner commitments.

In other Genstar news, the firm announced earlier this month that it sold its position in BioSource International Inc. (Nasdaq:BIOI) to Invitrogen Corp. (Nasdaq:IVGN). Genstar originally invested in the life sciences products company in February 2000. With a 31% beneficial stake in BioSource, Genstar was the company’s largest shareholder.

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