Thanks to Berkshire & Conning, Sterling Is Now in Good Hands with Allstate –

Sometimes matches aren’t made in heaven but in an auto body shop.

In what was characterized as an “experiment” in the auto repair and insurance industries, Allstate Corp. in May acquired Sterling Collision Centers from Conning Capital and Berkshire Partners. So far the experiment is proving successful for both companies and for the private equity investors, who have committed about $30 million to Sterling over the last three years and doubled their returns with the sale to Allstate.

Allstate Bids for Sterling

Impressed with Sterling’s business, Allstate made an unsolicited bid to acquire the company in January 2001. At first, the move surprised Sterling Chief Executive Officer John McNeill. “But the more we thought about it, the more it made sense to the business,” he says.

The insurance giant, widely known by its “You’re In Good Hands With Allstate” slogan, evidently decided its policy holders could be in even better hands with Sterling as its subsidiary instead of as its customer.

“They had conversations with management around how to ensure that the customers they directed to Sterling could get priority treatment,” says Ross Jones, a partner with Berkshire Partners. “And they came to the conclusion that to really drive down the cycle time and give customers a differentiated quality it would be a lot more effective in reaching that goal if they owned the business as opposed to being a customer.”

Those close to the deal say they never imagined a liquidity event involving an insurance company. “We envisioned a strategic buyer more in the line of a GM, Ford or Chrysler,” McNeill says. “This has never been done in North America before, where an insurer has acquired a body shop, and there were a lot of things we had to explain to our people about why this was a good thing.”

However, Allstate’s integration of Sterling was not without hurdles. One roadblock was the dissatisfaction among other insurance companies of having previously been able to refer their customers to Sterling auto shops before the deal and before Sterling became a competitor. But Jones says that recently, the shops have been servicing primarily Allstate policy holders.

For Allstate, the deal gives its customers access to a nationwide network of auto body shops to cure all automobile issues, from the occasional fender bender to the more serious accidental wreckage.

“They felt like this was the first step to being able to offer something that other insurance companies wouldn’t be able to offer,” Jones says.

Sterling stands to benefit by gaining access to resources to further expand its facilities and geographic coverage. “We’re only two months in and our shops are now filled with volume, and we’re working on expanding locations on a more rapid pace,” McNeill says.

He adds that Sterling’s long-term goals include adding 200 units and reaching $1 billion in revenue within the next five years. The company has revenue of approximately $100 million. “We certainly have a good head start in a partner that could help us do that,” McNeill says.

Changing Flat Tires

In 1997, Sterling Collision Centers received an $8 million infusion led by Hartford, Conn.-based Conning Capital. A unit of Conning Corp., which was recently acquired by Swiss Re, Conning Capital provides investment management and research services to insurance companies, mutual funds and pension funds. Conning also brought in McNeill as CEO and his vision of “fundamentally changing the model” in the auto body industry, as well as a new group of large insurance companies, which were also its limited partners.

“All this gave us a toehold operation and a pool of capital to begin building systems and infrastructure and start acquiring other repair facilities,” Steve Piaker, a partner at Conning Capital, said at the time.

A year later, Sterling attracted $25 million from investors including Boston-based Berkshire Partners, which committed $12 million.

Jones says Berkshire saw a “highly fragmented industry with about 50,000 independent repair shops with no real quality leader. Sterling had positioned itself in the industry to acquire facilities and it also had relationships with the large auto insurers, which promised to be able to deliver additional sales to their locations.”

Jones adds that the auto repair industry is “marked with dysfunction and distrust” among auto collisions repair businesses, insurance companies and their customers, which Sterling sought to mend by reducing the cycle time for auto repairs through relationships with insurance companies.

So the two private equity sponsors and auto repair trailblazer began work to set Sterling apart from its 50,000 counterparts. Creating a more team-oriented process on the shop floor is one major issue. “You had a repair process that was driven on the shop floor by technicians,” Ross says. “It was a very burdensome job, and it was a very individualistic environment built around the technician.”

Berkshire brought on Frank Musone, described as a “world-class lean manufacturing guy” by Jones, to help boost the company’s operations.

“He had a dramatic impact on our operating philosophy and really helped us get to the point where we could continue to grow the cash flow of our facilities,” McNeill of Sterling says.

As the company’s operations improved, it began to make acquisitions. By mid-1998 its facility size had grown from three to 18. “But that kind of pace wasn’t sustainable given the amount of work that needed to be done,” Jones says.

The company slowed its acquisition pace and built its own facilities to further differentiate itself. “We began to leverage our industry relationships to put up greenfields where we would identify attractive markets, worked with partners that could drive business, and began launching facilities where we could build them to suit,” Piaker says.

The company currently operates 40 mega-centers in seven states.