Acquirer Spring 2013 - Livingstone Partners

A platform for recoverySPECIAL SITUATIONSHow Livingstone’s Special Situations team can help good companies with too muchdebt return to stability and protect value for all stakeholdersIt may seem like common sense that a company trapped undertoo much debt, unable to service its interest obligations andbreaching bank covenants, shouldn’t be able to survive. However,many of these companies are fundamentally sound businesses;they have just been overwhelmed by the debt and cost structuresput in place before the credit crisis.If lenders pull the plug on such a business, they may jeopardisea full recovery, shareholders’ equity value will be wiped out, andmanagement and staff will lose their jobs. The business coulddisappear altogether, causing irreparable damage to suppliers andcustomers. It’s hard to see how anyone gains from such a situation,but time is often short and lenders may regard liquidation as the pathof least resistance. They need to be shown that there are alternatives.THERE IS A BETTER WAYBy persuading the banks that there is better way, Livingstone’sSpecial Situations team can frequently save a company frominsolvency, give management the opportunity to continue workingwith the company, potentially help current shareholders retain equityvalue, and maximise recovery for the bank. The outcomes can involverefinancing with new lenders, an outright sale to a strategic acquirer,or bringing in new equity providers to restore the business to growth.The recent sale of American SportWorks (ASW) is a good exampleof the latter. Established in 1959, ASW manufactures and distributesoff-road utility vehicles and go-karts for a variety of US retailers.ASW’s business had declined steadily over recent years amidthe broader macroeconomic crisis and reduction in discretionaryconsumer spending. The business was also saddled with high debtlevels from a previous buy-out at the height of the M&A market.The business was struggling to keep up its debt service and hadlittle or no liquidity to fund growth.The team turned to Joe Greenwood, Managing Director atLivingstone Chicago, who quickly assessed the company’s strategicalternatives. It was readily apparent that a sale of the business wasthe only way to maximise value for all stakeholders, and Livingstoneidentified a universe of potential partners for the company, includingfinancial investors with an appetite for distressed businesses,consumer-focused private equity houses and strategic acquirers.Ambassador Enterprises, a Fort Wayne, Indiana-based familyoffice that has experience acquiring distressed assets, expressed astrong interest in working towards a solution with the company andwas willing to move rapidly to get ahead of the broader process.While moving quickly is important, competition is also key todriving better terms for stakeholders. Livingstone created a ‘dualpath’ by expediting the due diligence with Ambassador, while at thesame time continuing to market the business to other potentialbuyers. Livingstone successfully negotiated and closed the sale ofASW to Ambassador Enterprises in November 2012.The benefits of this were clear: the staff and employees retainedtheir jobs; ASW’s senior lender was paid off in full; the subordinatedlender received cash consideration; and the company’s vendors andsuppliers will still have a market to sell the product. And the companyitself has a new, supportive partner, as Greenwood explains: “Thispartnership will enable ASW to stimulate its market expansion andmaintain its leadership position in the UTV and go-kart market.”STRATEGIC STEPSSometimes, a strategic acquirer rather than a financial investor isthe most appropriate way to liberate a company from a bad balancesheet. Trade buyers have embedded industry knowledge and don’tneed to do as much diligence, and have other operational resourcesto draw upon to help return underperforming businesses to growth.Integration synergies can lower the cost base, making an existinglevel of trading more sustainable.Acquiring a company that has got into trouble can also be acost-effective way for a company to move into a new geography.The acquisition of Intensiv-Filter Group by HimenviroEnvironmental Technologies of India demonstrates this well.Established in 1922, Intensiv-Filter is an international plantmanufacturer headquartered in Velbert-Langenberg in NorthRhine-Westphalia, Germany, which designs, develops, manufacturesand installs dust filters for industrial applications. It is a pioneer inenergy-efficient, environmentally friendly dust filtration solutions,and has an international customer base of blue-chip companies.While it had historically generated sales of about €50 milliona year, Intensiv-Filter had struggled to compete with lower-costinternational offerings and had tipped into administration. Theadministrator appointed Livingstone to run a carefully structuredsale process, while maintaining the support of the company’screditors and Workers’ Council.In a very short timeframe, Livingstone Düsseldorf engaged with70 potential strategic acquirers and competitors around the world.The time pressure and the complexity of Intensiv-Filter’s businessmodel made the process challenging, but Himenviro drew on itsunderstanding of the sector to create a plan to return the company togrowth. Manoj Garg, CEO of Himenviro, explains: “We’re convincedthat we will be able to reposition Intensiv-Filter, with its outstandingreputation in the industry, and put it on a sound footing again.”FAST AND FAVOURABLEDr. André Schröer, Director at Livingstone Düsseldorf, comments:“We are very pleased to have found a strong partner for Intensiv-Filter in just eight weeks, and that we were able to help one of theworld’s oldest filter manufacturers at this decisive step. With the saleto Himenviro Environmental Technologies, we saved about 60work-places in Velbert-Langenberg and have found an investorwho will lead the company back towards a successful path again.”As these transactions show, Livingstone’s experienced SpecialSituations team can help move a good business beyond its shorttermtrading difficulties and put it back on a path to stability.WWW.LIVINGSTONEPARTNERS.COM // SPRING 2013 // 21