Capital Ideas | Newsletter 2nd Half 2018

Capital Ideas for Middle Market Businesses

Dear [[First Name]],

Welcome to this issue of Capital Ideas, our newsletter dedicated to business selling, business buying and financial resources for mid-market companies.

Middle Market Business Insights

M&A activity for North American based target companies during the second quarter of 2018 included 2,183 closed deals, according to data published by industry data tracker FactSet.

One of the largest middle market deals of the quarter was announced in April when Hawthorne Hydroponics, LLC, a subsidiary of The Hawthorne Gardening Co, ultimately owned by Scotts Miracle-Gro Co, acquired Sunlight Supply, Inc. for US$470 million in cash, stock and contingent payout. The deal amounted to a multiple of 8.55x EBITDA. Under the terms of transaction, Hawthorne Hydroponics paid US$425 million in cash, US$25 million in stock and will make an additional earnout payment of US$20 million based on certain performance metrics achieved by Sunlight Supply. Sunlight Supply is located in Vancouver, Washington and manufactures and wholesales aquarium & horticulture lighting systems. It generated revenues of US$460 million and an EBITDA of US$55 million for the fiscal year 2017.

From a general M&A perspective, Q2 2018 was relative steady with an average of 727closed deals per month. The most active month was May, which had 777 closed deals.

Transactional Overview

Notable closed lower middle market transactions in the second quarter of 2018 include:

May 2018 - Tyler Technologies, Inc., acquired Sage Data Security LLC, a portfolio company of Knob Hill Partners LLC, for US$11.5 in cash, subject to certain post-closing adjustments. The acquisition was funded through Tyler Technologies’ existing cash balances. Tyler Technologies provides integrated technology and management solutions and services for the public sector with a focus on local governments. Sage Data Security provides information security services. The firm serves as a strategic security partner for financial institutions, healthcare providers, government agencies and data-sensitive businesses. The company was founded in 2002 and is headquartered in Portland, ME.

April 2018 - Zix Corp acquired Cm2.Com, Inc., trading as Erado, for US$15 million in cash. The transaction would expand Zix's Unified Archiving, eDiscovery and Compliance Solutions. Zix offers email encryption, data loss prevention and Bring-Your-Own-Device security to meet business data protection and compliance needs. CM2.Com provides financial archiving, supervision, eDiscovery and analytics services. The firm's services include social media archiving, email archiving, instant message archiving, mobile archiving, website & blog, audio & video, email security platform and integrated messaging platform. The company was founded in 1994 and is headquartered in Renton, WA.

April 2018 - Strength Capital Partners, LLC acquired an undisclosed majority stake in ESP Associates, Inc. for US$46 million in cash. The transaction was financed by Citizens Bank. Founded in 2000, Strength Capital Partners is a private equity firm located in Birmingham, Michigan with an additional office in Cincinnati, Ohio. ESP Associates operates as an engineering design and consulting firm that provides engineering, surveying and planning services. It offers site civil engineering, water resources engineering, geotechnical engineering, aerial mapping and land planning. The company is headquartered in Fort Mill, SC.

M&A Update

The US manufacturing sector remains on a growth trajectory, according to new data from the Institute for Supply Management (ISM). Overall, manufacturers in June 2018 reported continued growth in production, new orders, and employment, but while production growth gained steam, new orders and employment growth slowed in June compared to the prior month. Of the 18 manufacturing industries covered in the ISM report, 17 reported growth in June, including wood products; electrical equipment, appliances, and components; fabricated metal products; computer & electronic products; food, beverage, and tobacco products; transportation equipment; machinery; primary metals; chemical products; and petroleum and coal products. While the manufacturing sector is generally enjoying robust demand, the ISM suggested that the attention of many companies has been diverted to creating contingency plans because of the ongoing trade strife between the US and key trading partners. Some manufacturers reported considering moving production out of the US to avoid tariffs on US goods. The ISM also suggests that US tariffs on imported steel and aluminum, combined with trucking shortages, are creating supply chain issues for some manufacturers.

Industry Indicators

  • Total US manufacturers' shipments, which indicate manufacturing sector activity, rose 7.2% year-to-date in May 2018 compared to the same period in 2017.

  • The spot price of crude oil, which indicates energy prices paid by manufacturers, rose 64.0% in the week ending July 6, 2018, compared to the same week in 2017.

  • US tourism spending on all tourism goods and services, which impacts the wholesale sector revenues, increased 5.4% in the third quarter of 2017 compared to the same period in 2016.

  • Total US wholesale sales, a measure of the wholesale sector, rose 12.3% in May 2018 compared to the same period in 2017.


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2nd Half  |  2018