Turnaround firms are behind many of the investments in the manufacturing sector as the perennially troubled sector climbs out of the economic downturn.
Of the 10 most active U.S.-based sponsors of control-stake investments in the manufacturing sector since January 2010, six—
“In many cases good companies made it through the global financial crisis, but needed to learn how to operate with significantly lower revenues in a stagnant economic environment,” Scott Edwards, a principal at turnaround shop Sun Capital Partners, told Buyouts.
The ten most active sponsors, in terms of platform investments, are HIG Capital, with at least 11 platform acquisitions (some firms may have a different count for what they consider manufacturing deals than Thomson Reuters data);
Together, these firms closed 77 manufacturing deals since January 2010, with a disclosed value of $9.5 billion; 49 were platform acquisitions. The largest deal was Carlyle Group’s buy of NBTY, a Ronkonkoma, N.Y.-based manufacturer of nutritional supplements, for approximately $3.8 billion.
The most popular sub-sectors for the 10 most active firms suggests many are trying to time the economic rebound with investments in more cyclical sectors, such as chemicals, while more steady-eddy sectors, such as packaging, remain popular. Building/Construction & Engineering and Chemicals came out on top with seven deals each, followed by Other Industrials and Textiles & Apparel, with six deals each; and Automobiles & Components and Packaging with five deals each.
Chemical companies, in particular, require substantial capital expenditures in terms of labor as well as plant construction and maintenance, said Mark Porter, a partner at the consulting firm Bain & Co. Porter said he’s seeing more deal activity in chemicals than in any other manufacturing sub-sector. This means that sponsors investing in the sector—HIG Capital, Carlyle, and Platinum, among others—believe a rebound will justify those expenses. “The private equity buyers that are bold enough to buy early on while valuations are attractive will benefit as the cycle recovers,” Porter said.
Overall, U.S.-based sponsor-backed acquisitions in manufacturing have steadily increased—particularly in terms of deal value—since a near-term nadir a 2009, when U.S.-based sponsors closed 224 deals with a disclosed value of $7.6 billion (the peak was 2007, when sponsors closed 536 deals with a disclosed value of $99.58 billion), according to Thomson Reuters. In 2010, sponsors closed 292 deals with a disclosed value of $19 billion. As of July 19, sponsors had closed 136 deals with a disclosed value of $15.4 billion.
The number of deals hasn’t increased dramatically and even appears stagnant so far in 2011 compared to last year. But, said Porter, of Bain & Co., “in terms of economic importance of deal activity, the value is a better indication of importance than volume.”
Below is a snapshot of each of the ten most active firms since last January, according to platform investments. For firms with same number of platform investments, those whose companies completed more add-on deals were ranked higher.
1. HIG CAPITAL LLC
Platforms:
11
Add-ons: 4
Total disclosed value: $406.8 million
Investments in manufacturing by the low-key, ever-prolific Miami-based shop’s were spread across several sub-sectors, including three deals in Food and Kindred Products, and two each in Chemicals and Allied Products, Metal Products and Rubber and Miscellaneous Plastic Products. Its largest manufacturing deal in terms of disclosed value was its acquisition of Teleflex Marine, a Limerick, Pa.-based maker of steering and control products, for $121.6 million. The seller was Teleflex Inc. The firm did not respond to requests for comment.
2. THE RIVERSIDE CO.
Platforms:
8
Add-ons: 1
Total disclosed value: $24.3 million
The lower-mid-market buyout shop was particularly active in health care and consumer staples manufacturing, in which it closed two deals each. These include its acquisitions of Arena Italia SpA, an Italian manufacturer and retailer of swimwear and accessories, and Orthomed SA, a French manufacturer of medical devices, for undisclosed amounts. Co-CEO Béla Szigethy told Buyouts he expects a pick-up in North American manufacturing as companies re-evaluate the economics of outsourcing to China as the Yuan appreciates and the dollar weakens. Early last decade, companies could save 40 percent to 50 percent on labor costs by manufacturing in China, he said. “That’s no longer true. In certain cases, once you take the all-in costs [such as shipping], there’s no advantage to manufacturing in China,” he said.
3. Sun Capital Partners
Platforms:
6
Add-ons: 10
Total disclosed value: $147 million
Sun Capital has been enamored with companies in the packaging businesses since January 2010, with two add-on and two platform acquisitions. (It also invested in several other sub-sectors, such as Rubber and Miscellaneous Plastic Products, Machinery and Aerospace & Aircraft.) These include the acquisitions of Reuther Verpackung GmbH & Co. KG, a German manufacturer of packing products, and Alcan Packaging Beauty Services SAS, a French manufacturer of packaging products, for undisclosed amounts. The packaging industry has historically grown slightly faster than gross domestic product, and packaging companies respond well to capital investments, Scott Edwards, a principal with the Boca Raton-based firm, told Buyouts. For example, in 2009, its portfolio company Exopack bought a new 8-color printing press that cost approximately $4.5 million to buy and install. In the same year, the press generated $10.1 million of EBITDA, representing a “pay-back,” or the time it takes a capital investment to pay off, of just half a year, Edwards said. “I won’t say it’s recession-proof, but it’s more recession resistant,” Edwards said of packaging companies.
4. The Carlyle Group
Platforms:
4
Add-ons: 4
Total disclosed value: $7.94 billion
Four of Carlyle’s total of eight manufacturing deals fell into the Metal and Metal Products sub-sector, including its $3.7 billion buyout of CommScope Inc., a Hickory, N.C.-based manufacturer of cables for the communications market. Other notable deals included its $3.8 billion buyout of NBTY Inc. and its buyout of Tsubaki Nakashima Co. Ltd., a Japanese manufacturer of bearing balls, for $469 million. The firm declined to comment.
5. The Gores Group
Platforms:
4
Add-ons: 2
Total disclosed value: $217.3 million
The Gores Group’s manufacturing deals were spread out over several sub-sectors, including Transportation Equipment, Construction Firms and Communications Equipment. The firm’s largest deal, by disclosed value, was its acquisition of National Envelope Corp., a Uniondale, N.Y.-based manufacturer of envelopes, for $208 million. The firm did not respond to requests for comment.
6. Graham Partners
Platforms:
4
Add-ons: 0
Total disclosed value: 0
Managing Principal Christina Morin told Buyouts the Newtown Square, Pa.-based firm’s ample stable of operating partners have spent much of their time since early 2010 adapting to rising prices for raw materials by focusing on cost-cutting and new product development. At Eberle Design Inc., a manufacturer of traffic control products that Graham bought in late 2010, the firm helped redesign the manufacturing floor for a core product that reduced assembly preparation to 15 minutes from two hours and reduced labor hours 50 percent. And the Mine Safety and Health Administration recently granted another Graham company, Strata Products Worldwide LLC, the right to distribute a new technology called “proximity detection,” which uses magnetic fields to alert underground miners when they’re close to heavy equipment or machines that could hurt them.
7. Platinum Equity LLC
Platforms:
3
Add-ons: 5
Total disclosed value: $104.9 million
Much of the Los Angeles-based turnaround shop’s attention has been paid to its build-out of Ryerson Inc., a Chicago-based, 168-year-old company it bought in 2007 for $2 billion. The company processes and distributes steel and other materials to customers like Whirlpool Corp. and Freightliner. Since January 2010, four of Platinum’s total of eight acquisitions in manufacturing have been Ryerson add-ons. These include the purchase SFI-Gray Steel Inc., a Houston-based manufacturer of steel plate products, for $20 million. The firm did not respond to requests for comment.
8. Irving Place Capital
Platforms:
3
Add-ons: 1
Total disclosed value: $386.9 million
In recent years, Irving Place has carved out a niche for itself in the packaging industry, an effort led by senior managing director Phil Carpenter. In 2007 the firm hired Phil Yates, the former CEO of a packaging company, as a senior adviser. In September 2010, the firm bought Alpha Packaging Inc., a St. Louis-based manufacturer of plastic bottles and jars; a few months later, it backed Alpha Packaging in its add-on acquisition of Progressive Plastics Inc., a Cleveland-based manufacturer of plastic products. Irving Place’s largest manufacturing deal by disclosed value over the past 18 months was it buyout of Thermadyne Holdings Corp., a St. Louis-based manufacturer of cutting and welding products, in a deal valued at $386.9 million. Executives at the firm were not available for comment.
9. Linsalata Capital Partners
Platforms:
3
Add-ons: 1
Total disclosed value: 0
The senior leaders of the Mayfield Heights, Ohio-based shop—Frank Linsalata, Eric Bacon and Stephen Perry—all started their careers working at manufacturing companies in the 1970s and 1980s, and manufacturing remains a specialty. They’ve been spending much of their time in recent months re-aligning their companies’ supply chains and shifting manufacturing operations from China, where wages have increased, to countries like Vietnam, Cambodia and Indonesia. “You have to be nimbly and globally looking for the next frontier in low-cost labor,” Bacon said. The firm has also tried to find companies that are recession resistant. Case in point: Its acquisition in January 2010 of women’s swimwear manufacturer Manhattan Beachwear LLC. “Women’s swimwear did great in ’08 and ’09,” Bacon said. “If a woman’s body changed, she has to get all new swimwear. She also doesn’t want last year’s swimwear.”
10. Golden Gate Capital
Platforms:
3
Add-ons: 0
Total disclosed value: $282 million
Two of the San Francisco-based firm’s acquisitions in our sample reflect an interest in printing: On the same day in April 2010, it bought both West Point Products Inc., a Valley Grove, W.Va.-based manufacturer of replacement toner cartridges, ribbons and inkjet cartridges; and Clover Technologies Group LLC, a Hoffman Estates, Ill.-based manufacturer of recycled printing supplies, for undisclosed amounts. Golden Gate’s other deal in our sample was its buyout of Conexant Systems Inc., a Newport Beach, Calif.-based manufacturer of semiconductors, in a deal valued at $282 million. The firm declined to comment.
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