Yellowstone Unclamps Grayloc –

Yellowstone Capital Inc. has traditionally invested in highly engineered, non-commodity products that serve a specific niche. In 2000, the firm was able to find those characteristics and more in specialty clamp maker Grayloc Products, and it was those traits that ultimately led to its sale to Oceaneering International Inc. (NYSE: OII), an advanced applied technology company.

Yellowstone purchased a roughly 80% stake in Grayloc back in 2000 through its 1995-vintage Yellowstone Capital Fund in a deal organized by the now-defunct Arthur Andersen. In the exit, Grayloc was sold to Oceaneering for $41 million, a price subject to a post-closing working capital adjustment. No other financial terms or return data were disclosed.

“Grayloc was doing very well financially, and right now it is a good sellers’ market,” said Rick Owen, chief financial officer at Yellowstone Capital. “We felt that with the combination of achieving our objectives, and our firm having a good five-year ownership, it was time for us to pursue an exit.”

For more than 50 years, Grayloc Products, with global manufacturing facilities in Houston, Texas and, more recently, in Aberdeen, Scotland, has been creating its own brand of clamp connectors, which are used in production manifold, flow line and valve installations. The company primarily serves the energy industry but also maintains a presence in aerospace and food processing markets. The performance clamp connector market is a roughly $75 million annual market, and Grayloc holds a steady grip in the space with a market share estimated to be between 45% and 50 percent.

“One of our particular interests in Grayloc to begin with was that it had a very well-known name in the industry,” Owen said.

According to Owen, prior to Yellowstone’s acquisition of Grayloc back in 2000, it was owned by ABB Vetco Gray, which had determined that it was no longer a core business for them.

“We are energy investors,” said Owen. “We saw that there was a great potential for international expansion with Grayloc.”

Owen added that, under ABB Vetco Gray, there was a good North American operation already in place, but the biggest problem was that Grayloc’s operations abroad were dispersed among a number of different countries.

“What we did was bring it all under one roof in Aberdeen, Scotland,” he said. “We consolidated the manufacturing, put in common systems, hired full-time salespeople and launched a more focused attack.”

Oceaneering, which learned about the sale of Grayloc through Simmons & Company International, Yellowstone’s advisor, plans to pick up where Yellowstone left off. The company intends to keep current management in place, and will focus on continuing its global expansion.

During the rest of 2005, Oceaneering is hoping to see a net income of $1.3 million to $1.6 million. The acquired operations are anticipated to generate $16 million to $18 million in revenue and $3 million to $3.5 million of operating income, after about $400,000 of depreciation and amortization. In 2006, Oceaneering projects the incremental net income accretion to be $3 million to $4 million.

Yellowstone’s exit of Grayloc has left the firm without any current portfolio companies that would fit in the traditional energy arena. However, according to Owen, “…we are out at this time looking for other companies…”

That said, Yellowstone doesn’t exactly have both eyes focused in that direction. While one eye is scanning the market for new traditional energy acquisition opportunities, the other is looking to invest in the alternative energy space.

“Alternative energy has always been an interest of ours,” Owen said. “With rising traditional energy prices and the development of alternative energy technologies, which have come a long way in recent years, the international and geopolitical factors are leading us to believe that now is the time to make investments.”

Yellowstone is looking to make investments of this sort through its alternative energy fund, a new vehicle that is currently out in the market fundraising. The firm anticipates holding a final close on the fund by the end of the year.