Capital Ideas | Newsletter Q1 2018

 
Capital Ideas for Middle Market Businesses

Middle Market Business Insights

M&A activity for North American based target companies during the fourth quarter of 2017 included 1,777 closed deals, according to data published by industry data tracker FactSet.

One of the largest deals of the quarter was completed in December when Ferrero SpA acquired Ferrara Candy Co., Inc, a portfolio company of Catterton Management Co LLC, for a reported value of US$1.3 billion, including debt. The acquisition expands Ferrero’s product offerings and footprint into United States markets. Under the terms, Ferrara will operate as a separate unit and maintain its headquarters in Oakbrook Terrace.



From an M&A perspective, Q3 2017 was relative steady with an average of 592 closed deals per month. The most active month was October, which had 686 closed deals.

Transactional Overview

Notable closed lower middle market transactions in the fourth quarter of 2017 include:

December 2017 - AV Homes, Inc. acquired MMLC Texas Builders LLC, trading as Oakdale Homes and Hampton Homes, for approximately US$42 million in cash, subject to customary adjustments. The transaction was in line with growth strategy of AV Homes, Inc. and enables it to enter into Dallas/Fort Worth market. AV Homes is a homebuilder company that engages in the business of homebuilding and community development in Florida, Arizona and the Carolinas. MMLC Texas Builders engages in the construction of buildings. The company was founded in 1989 and is headquartered in Farmers Branch, TX.

December 2017 - MISTRAS Group, Inc. acquired West Penn Non-Destructive Testing LLC for US$74 million in cash. MISTRAS Group engages in the provision of technology-enabled asset protection solutions. West Penn Non-Destructive Testing provides non-destructive testing services. The firm operates in the metals, aerospace, nuclear, commercial manufacturing, military and automotive industries. The company is headquartered in New Kensington, PA.

December 2017 - Transit Holdings, Inc., a subsidiary of New Flyer Industries, Inc., acquired ARBOC Specialty Vehicles LLC from HIG Capital LLC, for US$95 million in cash, subject to certain purchase price adjustment. Transit Holdings manufactures heavy-duty transit buses. ARBOC Specialty Vehicles designs and manufactures specialty vehicles. The firm's products include spirit of independence, spirit of mobility, spirit of freedom, spirit of liberty and spirit of equess. The company was in 2008 and is headquartered in Middlebury, Canada.


Industry Update

High demand and low supply of IT professionals may lead to turnover in 2018, according to Spiceworks' IT Career Outlook for 2018. The report, cited recently in Tech Republic, surveyed more than 2,100 IT professionals from North America and Europe. About a third of respondents said they plan to search for or take an IT job with a new employer in 2018. Among those seeking to switch employers, 75% said they are seeking higher pay, 70% said they want to advance their skills (particularly in cybersecurity), and 39% said they want to work for a company that better prioritizes IT. Despite more than 80% of IT professionals reporting that cybersecurity expertise is critical, only about 20% reported having advanced cybersecurity knowledge. Millennials said they are most likely to seek new employment (36%), followed by Gen Xers (32%), and baby boomers (23%). Some 68% of millennial IT workers feel underpaid, compared to 60% of Gen X and 61% of baby boomers.

Overall M&A Market - Industry Indicators

  • Total US consumer spending, a driver for the IT needs of consumers, rose 1.8%, primarily from services expenditures, in November 2017 compared to the same month in 2016.

  • The average US retail price for diesel and regular gas, a major operating cost for distributor fleets in the wholesale sector, rose 17.1% and 8.4%, respectively, in the week ending January 15, 2018, compared to the same week in 2017.

  • Total US manufacturers' shipments, an indicator of demand for industries in the wholesale sector, rose 5.2% year-to-date in November 2017 compared to the same period in 2016.

  • Total US wholesale sales, a measure of the wholesale sector, rose 9.7% in November 2017 compared to the same period in 2016.

Outlook

Amazon Keeps Taking Market Share

In a move against corporate suppliers, Amazon has formed Business Prime Shipping (BPS), a Prime membership service for businesses. BPS, available in the US and Germany for $499 to as much as $10,099 per year, depending on company size, offers free, two-day delivery. Business-to-business (B2B) transactions have been slower to shift online than consumer transactions, according to Bloomberg News. Shares of industrial wholesalers WW Grainger and Fastenal declined on the Amazon news due to investor concern that the company will use the lure of low prices and convenience to win suppliers' business. The move also threatens office supply wholesalers and the B2B arms of office supply retailers, as well as electronics and food service suppliers, among others. The launch of BPS follows that of Amazon Business in 2015. Amazon Business was formed as the successor to AmazonSupply, a B2B e-commerce marketplace introduced in 2012


Case Study

 

Issue:

Our client, the seller, owned a holding company comprised of five (5) separate subsidiaries. Three of those subsidiaries were fast growing while the two others, though highly synergistic with each other, were legacy companies on slower growth paths and not synergistic with the other three. The challenges for the seller and, hence, CFA were initially two-fold: 1.) generate growth capital for the three fast growing companies; and 2.) do not sell any equity in the holding company or cause it to incur any bank debt.

Solution:

The CFA Columbus office worked with the seller to achieve their objectives. The two slower growing subs were packaged up as separate sale mandates and brought to market before their respective and specifically targeted strategic and financial potential buyers. However, during the process, as the result of internal family dynamics, a third seller challenge emerged i.e. sell the two companies simultaneously! This required disengaging from a buyer already interested in only one of the companies and reconfiguring the sale process to find a single buyer for both companies. We then redirected our attentions internally and found a capable manager that was the primary face to the customers of both companies and was willing and able to do a buyout of both with the assist of a note to the seller.

Results:

Both companies were sold simultaneously. The harvested sale proceeds were re-invested in the three remaining companies, which continue to grow quickly. No equity was sold in the holding company or the remaining subs and no bank debt was taken on.

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First Quarter  |  2018