Three Firms Manage Rare LBO Deals

Despite the toughest market for leveraged buyouts in years, three local equity investment firms have bucked the trend and have closed a handful of deals within the last few weeks.

The Riverside Co. and Blue Point Capital Partners in Cleveland, and Edgewater Capital Partners in Chagrin Falls, all put the finishing touches on buyouts recently, though executives at the firms are quick to admit that it isn’t easy to get deals done right now.

“There are opportunities out there, although the world is challenging,” said Riverside managing general partner Stewart A. Kohl. As the economy has slowed, lenders have become tighter with credit and are lending at lower earnings multiples than they did just a year or two ago when the economy was flying high, Mr. Kohl said. “It’s been harder to find deals and finance them throughout this period,” Mr. Kohl said.

Edgewater associate Ryan Meany said the slowing economy also exposes flaws in companies that previously may have been viable acquisition candidates. “We probably had more deals in 2001 that fell away because (owners’) valuation expectations were too high” when compared to companies’ earnings performances, Mr. Meany said.

Even so, both Riverside and Edgewater recently have added companies to their portfolios. Riverside last Friday, Nov. 30, acquired a Chicago-based petroleum blending company as an add-on to Delta Petroleum Co. Nine days earlier, Riverside bought Clayton Group Services, a company in Novi, Mich., that provides occupational health and safety services, environmental services and laboratory consulting. That transaction followed the closing in October of a deal to acquire Ceram Insulators, a company in Vienna, Austria, that makes porcelain electrical insulators.

Meantime, Edgewater two weeks ago acquired Uniroyal Specialty Adhesives and Sealants Inc. of South Bend, Ind. “We were hoping to close the deal in September and lost basically a week of deal time because of the 11th,” Mr. Meany said, referring to the terrorist attacks of Sept. 11. “I think both the economy and Sept. 11 pushed a lot of deals to the fourth quarter.”

The numbers would appear to bear out Mr. Meany’s observation. According to recent data from Thomson Financial Services, there were 26 U.S. leveraged buyout deals valued at $776 million in this year’s third quarter, down from 89 deals totaling $10.4 billion in the third quarter of 2000. The third quarter of 2001 was the weakest in terms of deal volume in 18 years, based on Thomson’s figures. Sean Ward, principal of Blue Point, said obtaining financing and encouraging business owners to sell when their companies’ valuations are low are two factors hamstringing buyout deals right now.

Nonetheless, Blue Point on Nov. 14 was able to close a transaction to acquire Eclipse Manufacturing Co., a metal stamper in Sheboygan, Wis. “From a new business standpoint, we’ve done just a few new deals and a follow-on deal,” Mr. Ward said. “We did more in 2000. But we’re spending more time now working with our existing portfolio companies.”

On the other side of the fence, Tim Healy, a senior vice president in the equity sponsor group of the capital markets division at National City Corp., makes no secret that credit is tight now. Mr. Healy said lenders have shied away from deals because many companies aren’t posting earnings growth on a quarter-over-quarter basis, and because of concern over nonperformance of existing loans.

Despite the lending challenges, National City hasn’t stopped participating in buyout deals. “Even as the market has weakened, we’re able to go out and we’re still lending,” Mr. Healy said. “We’re closing several deals in the fourth quarter.” Mr. Healy said the ability of firms such as Blue Point, Riverside and Edgewater to find adequate financing and get deals done says a lot about the Cleveland buyout market. “The operating experience of the firms in town is critical,” he said. “This speaks to the fact that in a city like Cleveland, good relationships are critical.”

Crain’s Cleveland Business – December 03, 2001
By RYAN CORNELL