Graham Cements Eldorado Exit –

In a busy week that saw Graham Partners trade in one portfolio company for another, the firm posted a more than 4xequity return on the sale of Eldorado Stone and trailed that deal with the acquisition of Supreme Corq, a maker of faux-cork enclosures for wine bottles.

In its exit, Graham Partners sold architectural stone manufacturer Eldorado Stone to Headwaters Inc. in a deal valued at $202.5 million, plus an excess working capital adjustment of $8 million. The deal represents a multiple of roughly 9x Eldorado’s LTM EBITDA.

Graham Partners acquired a roughly 80% stake in the business in February 2001, and in all contributed around $18 million of equity to acquire and build the business. The firm teamed up on the transaction with company management, which held onto the remaining 20% stake.

To clean up the operations, Graham focused on making the different franchises of Eldorado more coherent in their marketing and product mix. Christina Morin, a principal with the firm, said, “There were a lot of franchisees using the Eldorado name, but there was no consistency between them. We made sure the franchises consolidated into one national product offering and worked to produce a consistent branding platform.”

Graham also moved to acquire some of its franchisees as a way to help smooth the transition into one consistent brand. “We made five acquisitions, all Eldorado franchisees,” Graham Managing Principal Robert Newbold said. “Now 95% of its franchised sales are confined to one entity.”

The plan worked, as Eldorado was able to post sales growth from $32 million a year, when Graham first invested in the company, to $112 million in revenue over the 12 months ended March 31, 2004.

For Graham, the sale helps reaffirm its focus on industries undergoing a conversion of some kind. Eldorado benefited from the transition of homebuilders to use faux stone overlays rather then the costlier and more-difficult-to-stack natural stones.

Wedbush Morgan, in a research note to clients, cited, “The company’s manufactured stone products compete in the fastest growing segment of the $7.9 billion siding market and are in high demand as an attractive, light weight, lower-cost alternative to natural stone. We have noticed substantial increased use of manufactured stone in new construction throughout Southern California in both residential and commercial applications.”

Morin also noted, “The conversion play was an important part of our thesis. In this case manufactured stone veneer was taking market share because the quality had gotten to the point where it was indistinguishable from real stone, and the price point was a third of the cost on an installed basis.”

Through the sale, Graham Partners will realize a return of 4.4x its investment, with an IRR of 57 percent. The proceeds from the deal will allow Graham to return to its limiteds 51% of the capital the firm has so far invested from the $227 million Graham Partners Investments LP Fund.

Rolling Stones Gather No Moss; Faux Corq Gathers No Mold

Less than a week after the Eldorado sale, Graham announced the acquisition of Supreme Corq, a maker of synthetic closures for wine and distilled spirits. The deal, according to Graham Managing Principal Joseph May, follows through with Graham’s focus on industries undergoing change. Terms of the transaction were not disclosed.

“The primary driver here is that natural cork can contain mold, which is the source of tainted wines. Synthetic cork eliminates that variable and reduces the amount of spoilage for wineries,” Graham Senior Associate Joshua Wilson said.

A spoiled bottle of wine brings to mind the taste of wet newspapers according to some accounts, and published reports have indicated that as much as one tablespoon of spoiled wine would be enough to taint an entire year’s wine production in the United States. Because of this, some wineries have begun looking to synthetic materials to cap their bottles as a way to avoid this threat.

To buy Supreme Corq, Graham tapped American Capital for the financing arrangement, which came in the form of senior debt and totaled $17 million. Graham would not comment on its equity stake in the investment other than to say it would come out of its $227 million Graham Partners Investments LP fund.

Graham Partners, which can trace its genealogy back to The Graham Group, views the investment in Supreme Corq as a play in the global packaging sector, one area where the Graham Group has historically earned its keep. “We have a heritage of working with packaging businesses, and we expect to focus that expertise to help this company seek out growth more aggressively on a worldwide basis,” May said.

Graham Partners could not disclose Supreme’s financial performance, although Wilson did say the company currently controls roughly 25% of the worldwide synthetic cork market, and the firm anticipates the synthetic market will continue to grow.

However, even while wineries are increasingly looking to use synthetic cork, competition is also coming from the screw caps, although most traditionalists wouldn’t deign to open their wine with anything but a corkscrew. Also squeezing the market, cork producers are not going down without a fight. Sabate-Diosos Group, a supplier of natural cork and cork wine enclosures has already broken ground on a 27,000 square foot facility in Spain that will be used to treat cork through “Supercritical CO2 Extraction,” a technology developed to eliminate undesirable compounds that can lead to “cork taint.”

Snapshot

Buyer: Graham Partners

Target: Supreme Corq

Purchase Price: Undisclosed

Legal Counsel: Drinker, Biddle & Reath LLP

Accountant: KPMG