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Top Stories
Quick Maneuvering: Kohlberg Picks up Bauer Hockey
 Nike Inc. said it has completed the sale of its Bauer Hockey subsidiary to an investor group led by Kohlberg & Co. and Canadian businessman W. Graeme Roustan for $200 million in cash. Nike decided to divest Bauer after a strategic review of its subsidiaries. Under the terms of the deal, Bauer will continue to use the Nike Bauer Hockey trademark on existing products for up to two years.
What a Click Is Worth: Morlex Acquires Ad Authority
Ad Authority, Inc., a leading innovator in direct to consumer internet marketing, announced its acquisition by Morlex, Inc., an Internet-focused customer acquisition company that owns and markets newsletters and websites targeting the personal finance and trading marketplace. In connection with the acquisition, Morlex closed a total of $4,400,000 in private placement of its commonstock and convertible notes. Joseph Gunnar & Co. acted as the private placement agent in connection with the private placement of common stock. Ad Authority was represented by Andrew M. Apfelberg of Rutter Hobbs & Davidoff Incorporated, and Morlex was represented by Jane Greyf and Martin P. Russo of Nixon Peabody LLP in connection with the acquisition.
A Manufacturer’s Bargain: Tyco agrees to sell Ancon
 Tyco International Ltd. said Wednesday it has agreed to sell its U.K.-based Ancon Building Products business to Irish building materials producer CRH PLC for about $174 million. Ancon, which operates in Europe, the Middle East and Australia, had 2007 sales of $107 million and employs 370 people. The deal is pending regulatory approvals and other closing conditions.
Hot Deal: Buckeye Partners Sells Farm & Home Oil Company
Buckeye Partners, L.P., announced that the Partnership closed on its previously announced sale of the retail division of its Farm & Home Oil Company LLC subsidiary to a wholly-owned subsidiary of Inergy, L.P., for $42 million plus a customary working capital adjustment. As part of the transaction, Buckeye and Inergy entered into a five-year supply agreement pursuant to which Buckeye will supply 100% of Inergy's liquid products requirements in certain areas of Eastern and Central Pennsylvania. After a transition period, the remaining wholesale division of Farm & Home will conduct its product marketing activities in the name of Buckeye Energy Services LLC.
Information for a Price: VSE Corporation Acquires G&B Solutions, Inc.
 VSE Corporation announced that it has acquired G&B Solutions, Inc. (G&B) of McLean, Virginia. The purchase price was approximately $19.5 million in cash, with the potential for additional payment of up to $4.2 million if certain financial targets are met during the next three years, subject to certain adjustments. For the year ended December 31, 2007, G&B recorded revenues of approximately $35 million and net income of approximately $2.1 million. G&B is a diversified information technology and management consulting company serving the U.S. Government market and recognized leader in the federal information technology sector.
Merrill Lynch announced this week that the firm has posted its third-straight quarterly loss. In this environment, adding value solely through financial engineering is likely going to be a lot tougher, as deal leverage is lower, time horizon longer, and the assumed growth rate of EBITDA is less. In this tougher climate middle-market deal makers will need to put on their creative thinking caps.
One possible source for inspiration may be gains from capital structures employed to make the most of real estate assets. A transaction as simple as a traditional mortgage financing or refinancing may allow for a 100 to 300 basis point arbitrage opportunity. In some instances, long-term ownership of real estate or joint venture initiatives may be a net positive.
John D. Troughton, Senior Brokerage Director at Cushman & Wakefield, Inc., points out that “[i]n January 2007, an ongoing econometric study tested the hypothesis that there is no significant difference between market valuation techniques between private equity deals and private equity REIT deals. The study indeed demonstrated that there is no significant difference between the distribution of premiums paid for each type of deal. Tests were redone over time with increasing sample size yielding consistent results. This study is another demonstration of the lack of consideration that real estate is often afforded in a private equity deal.”
Another advantageous scenario could be a sale-leaseback transaction. A sale-leaseback transaction is one in which owners sell their real estate holding(s) to individual investors, a private equity group, or a sale-leaseback company, if the deal calls for it, and then enters into a long-term lease of the same space.
Troughton also says that, “that there is arbitrage opportunity within sale-lease back REIT's that is not priced into private equity REIT deals. The arbitrage opportunity is being able to have a substantial amount of the carrying cost of a sale-lease back REIT real estate asset being covered by the existing lease, as the asset is being entitled for redevelopment. Basically, these sites are a developers dream come true and exists in private equity portfolio companies also."
Sale-leasebacks have seen advantageous real-estate monetization deployed because these agreements unlock real estate equity value efficiently. Proceeds from property sales can be used to pay down debt, grow a company, and provide capital for M&A transactions. These gains can also be applied in a myriad of ways that enhance corporate value and turn additional profits. Sale-leasebacks resulted in aggressive, profit-driven buyers, who drive the price of real estate higher. Meanwhile sellers have taken advantage of historically low interest rates and spreads.
Caveat emptor. While sale-leasebacks are efficient in leveraging a balance sheet and lower cost of capital, if the business goes the wrong way, then a business may be stuck in a long-term lease where the business is forced to buy back the properties at a premium. At this juncture a company may be least equipped to afford such a transaction. Before any deal is entered into any real estate—facilities, headquarters, branches, warehouses, distributions centers, unoccupied buildings, vacated factories, entitlements and rezoning—issue must be weighted.
Examining real estate value helps in determining which assets and facilities should be kept, leveraged, sold or considered for a sale-leaseback. As deals are set to be managed through a series of transitions, real estate covenant issues, tax implications, and mortgages are all tangible pools of assets.
Deal makers should remember these basics:
- assess property value correctly
- real estate and entitlements often determine a property’s land value
- seek excess land or facilities to determine if these have greater value in structuring an M&A or leveraged buyout deal
- beware of over-cross collateralization.
Well-structured, well-used real estate may be key to sustaining a profitable venture for both companies and their equity partners. |
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Turn On a Dime? Nope.
But how about turning on $350,000,000?
That’s what Sun Capital Partners did in 2007.
 In 2007, Sun Capital Partners, Inc. announced thirty-nine M&A deals. In twelve months the firm closed all thirty-nine deals. The volume of transactions closed, a whopping $350,000,000. The average deal size $15 million.
Sun Capital Partners, a private investment firm, focuses on leveraged buyouts, equity, debt and other investments targeting a diverse range of industries, with no particular industry excluded from consideration. The firm has approximately $10 billion of equity capital under management, and can invest more than $2 billion of capital in any one transaction.
Sun Capital Partners often bridges the entire purchase price at closing; raising permanent debt financing afterwards. Sun Capital's unique ability to close deals without external financing, staff of more than 180 people, and decisive approach to business enables us to close deals within 30 days compared to 3 to 6 months for most other buyers.
The completed 39 new acquisitions (27 platforms, 12 add-ons) acquisitions include: Hickory Farms, Limited Stores, Boston Market, Berkline Benchcraft, Edwin Watts Golf Shops, American Standard Americas, K.K. Tarami, Mark IV Industries, and Smokey Bones.
Since the firm’s inception, Sun Capital has acquired 179 companies, with combined revenues in excess of $35 billion and more than 150,000 employees. New acquisitions in 2007 represent over $10.7 billion in revenues.
The firm’s rapid rate of growth– closed on 39 transactions this year compared to 33 in 2006, 30 in 2005, 18 in 2004, and 16 in 2003 is attributed to its bridging strategy. According to Steven Liff, Managing Director, “Our ability to complete transactions in 30 days, on the terms initially proposed, has allowed us to build a solid reputation in the market place. We do not require financing contingencies and our reps and warranties do not survive closing. As such, the seller is not taking undue risk irrespective of what is taking place in the economy.” Indeed, Sun Capital has demonstrated its ability to close deals in tough economic environments. Sun Capital Partners’ bridging strategy permits a lower purchase price since sellers are willing to exchange certainty and expediency for lower price in distressed situations.
A major part of the firm’s success is a result of its full-time staff of experienced operators that assist the companies in their turnaround. Liff says, “We have been focused on our niche for quite a long time and have an incredible staff of transactional and operational professionals. This has allowed us to properly grow and manage our portfolio efficiently.” During the year, Sun Capital completed seven divestitures and five exits at significant multiples which demonstrate the ability to improve profitability and reduce debt.
In January 2007, Sun Capital completed the sale of Mattress Firm, one of the largest bedding retailers in the U.S. with approximately 286 company-owned stores and 54 franchised stores in 19 states, to J.W. Childs. During the period Mattress Firm was owned by Sun Capital, sales grew dramatically and EBITDA increased by 22x.
In March 2007, Sun Capital completed the sale of Dura-Line Corporation, a leading supplier of a diversified range of high-density polyethylene pipe, duct and conduit products used by the telecommunications, cable television, electric power, water, and natural gas industries to the Audax Group. The Dura-Line sale was based on a $120 million total enterprise value. Sun Capital’s equity investment in June 2003 was $2.2 million (IRR in excess of 200% and 42.7x multiple of investment).
In May 2007, Sun Capital completed the sale of its remaining interest (38.5%) in Horsehead Holding Corp. through a secondary 144A offering led by Friedman, Billings, Ramsey & Co. generating $142.4 million in sale proceeds. Sun Capital’s investment of $17 million in December 2003, generated over $342 million (IRR in excess of 150% and 18.4x multiple of investment).
In December 2007, Sun Capital completed the sale of Searles Valley Minerals, a leading producer of soda ash, sodium borates, boric acid, and sodium sulfate to Nirma Limited. During the period of Sun Capital’s ownership, sales and EBITDA grew from $211 million and ($1.2) million, respectively, for the twelve months prior to acquisition in March 2004, to $302.4 million and $27.5 million, respectively (IRR in excess of 200% and 58.2x multiple of investment).
Sun Capital's turnaround model has been record proven success. Meanwhile the firm says its strategy continues to be improved. We happily await IRR numbers for the coming years.
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