Talks Heat Up On Air Conditioning Co.

Target: IDQ Holdings Inc.

Sponsor: Castle Harlan Inc.

Seller: Arsenal Capital Partners

In one of the latest secondary deals, Arsenal Capital Partners is in talks to sell IDQ Holdings Inc., a make of air conditioning products for automobiles, to Castle Harlan Inc., according to a regulatory filing. A source with knowledge of the situation told Buyouts the deal could close by the end of June.

IDQ Holdings, based in Garland, Texas, is the parent of Interdynamics and Quest, two brands of air conditioning products such as leak sealers and service kits. The company also has an office in Tarrytown, N.Y.

For Arsenal Capital, the deal would bring an exit to the firm’s first-ever investment. In 2002, the New York-based shop bought Interdynamics, which was founded in 1970, in a deal valued at $43 million. In 2007, Arsenal Capital backed the company’s acquisition of a competitor, EF Products, whose products were sold under the Quest brand name. The deal would be the second exit this year for the firm, which in April sold Genovique Specialties Corp., a Rosemont, Ill.-based provider of benzoate plasticizers, to Eastman Chemical Corp.

Castle Harlan, also based in New York, looks to make the investment from Castle Harlan Partners V LP, according to the regulatory filing. The firm has been trying to raise its fifth fund for more than two years. Buyouts reported in March 2009 that it had raised $684 million, which is less than half of the vehicle’s $1.5 billion target. Despite the fundraising slog, the firm has posted some notable exits in the last two years. Its sale of United Malt Holdings, a maker of malt, beer and liquor, generated a 4.5x return on invested equity, and its exit from AmeriCast Technologies Inc., a maker of complex steel castings, generated 3x the firm’s invested equity.

The sale of IDQ Holdings would be the latest in a string of sponsor-to-sponsor transactions that have occurred in recent months. In the first quarter of 2010, there were 24 such deals representing $7 billion in deal value, according to London-based data provider Preqin. That was more than the market saw in all of 2009, when 43 firms sold companies to their peers, representing $5.1 billion in deal value, as Buyouts previously reported.

Executives at Castle Harlan declined to comment; executives at IDQ Holdings did not respond to requests for comment.