7/17/2014
Small Market Deal Of The Year: Auto supplier steered clear of trouble through Great Recession | Buyouts - Features | Private Markets
Thursday, 17 July 2014
Small Market Deal Of The Year: Auto
supplier steered clear of trouble
through Great Recession
19 March 2014 | By Danielle Fugazy, Contributor
SNAPSHOT
Firm: SunTx Capital Partners
Target: Huron Inc
Hold Period: 7.5 years
Return Multiple: 7.8x
Lenders: PNC Bank, Smith Whiley & Co, Invest Michigan Mezzanine Fund
(Credit Suisse)
WHY THE FIRM WON
Streamlined Huron’s business processes
Added new product lines
Refinanced the company
The U.S. auto industry was hit particularly hard by the Great Recession, but
that didn’t stop SunTx Capital Partners from scoring a big gain on an auto
supplier during a 7.5-year holding period.
Following a dramatic drop in automobile sales in the late 2000s, all of the
Big Three U.S. automakers—General Motors Co, Ford Motor Co and
Chrysler—were in serious trouble. Most auto part makers were doing no
better. However, despite the extremely challenging economic environment,
Michigan-based Huron Inc was able to emerge from the downturn with a
stronger balance sheet and expanded product offering—a feat that not many
in the space could claim today.
In 2005 SunTx Capital Partners bought Huron, a supplier of machined steel
rods, for $25.9 million, including equity and debt, after the company had
gone through an unsuccessful auction process. Capital for the deal came
from SunTx Capital Partners LP, the sponsor’s $235 million debut fund
raised in 2004.
Founded in 1943, Huron had been one of the last remaining holdings of
Strategic Industries LLC. Had SunTx Capital not stepped in and bought
Huron when it did, the company likely would have gone the way of many of
its peers that filed for Chapter 7 or Chapter 11 protection.
“It was an in an industry where we saw opportunity to use what had already
been built and make changes based on customers’ current and future
needs,” said Ned Fleming, managing partner and founder of SunTx Capital.
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“We took the expertise the previous owners had built and we grew the
business in collaboration with management, while making it more efficient.”
Under its previous owner, Huron had been cash constrained and had an
unmotivated workforce. Despite the issues facing the company, SunTx
Capital saw potential in Huron, which had positive growth dynamics and
strong customer relationships.
Sleeves Rolled Up
After the purchase was complete, SunTx Capital quickly got to work.
“The very first thing we did was get everyone at Huron to buy into the vision
that this was now going to be a company of excellence and we were going
to lead the company in that direction. When you do what’s in the best
interest of the company, everything else comes to bear. Create a great
company and you will create value for the company and your LPs,” said
Fleming. “That is our premise.”
Prior to SunTx Capital’s purchase, Huron for many years had maintained an
emphasis on machined steel rods without expanding its product base. Its
new sponsor positioned Huron to leverage its niche position, transforming
itself into a component supplier while expanding into the specialized tubular
fabrication market to serve the emerging powertrain technology market. As a
result of this growth, Huron was able to significantly expand its customer
base, particularly with Ford and Toyota Motor Corp engine programs, all
resulting in gained market share during and following the auto industry
collapse. Huron’s revenue from 2009 through 2013 increased by nearly 100
percent, according to SunTx Capital.
Additionally, while growing Huron’s product lines, SunTx Capital also worked
to lower costs and improve operations. For example, realizing that the
headwinds were building in 2008, SunTx Capital consolidated Huron’s two
plants into one, allowing the company to right-size its cost structure quickly
as sales volume in the auto sector dropped dramatically in 2009.
Simultaneously, the buyout shop reexamined costs and product profitability
and developed a new product cost accounting system and pricing strategy.
These changes led to better pricing decisions and better product portfolio
discipline. SunTx Capital also helped Huron renegotiate all of its raw
material pass-through agreements to ensure no margin erosion from raw
materials. The sponsor then successfully negotiated new labor contracts
with Huron’s local unions. The new contract was fair for employees,
favorable for Huron and reflected the economic environment, according to
SunTx Capital.
SunTx Capital made some financial changes to the company during its
period of ownership as well. Huron’s leverage ratios were at the market
limits prior to the buyout. With SunTx Capital’s help, Huron strategically
paid down debt and refinanced senior debt with lower interest rates and a
fixed-charge covenant. In October 2008, Huron refinanced its senior debt
obligations with PNC Business Credit, the asset-based lending arm of PNC
Bank. The refinancing closed only several weeks after the collapse of
Lehman Brothers.
“To have closed a major refinancing transaction in the midst of the Great
Recession when the debt financing markets had essentially shut down was
a true testament to the strength of Huron’s balance sheet and its operational
accomplishments,” said Fleming.
In September 2011, Huron announced the completion of a $27 million
dividend recapitalization, with support from Huron’s senior lender, PNC
Bank, and new subordinated debt lenders, Smith Whiley & Co and Credit
Suisse’s Invest Michigan Mezzanine Fund, further positioning the company
for growth.
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Shortly after, the time came to think about a sale. In February 2013, SunTx
Capital sold Huron to Dallas-based Trive Capital. Including all cash
distributions, SunTx Capital achieved a cash-on-cash return
of approximately 7.8x, with a gross IRR of approximately 33.5 percent. At
the time of the sale to Trive Capital, trailing 12-month revenue had nearly
doubled from 2009, while EBITDA had tripled.
“We are in the private equity business and we had been invested in Huron
for (close to) eight years,” said Fleming. ”The company was in good shape
and it was time to put the company in the next steward’s hands.”
Danielle Fugazy is a contributing editor to Buyouts Magazine.
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