Family Owned Business / Transitions
Magnatech International, Inc.
Magnatech International ("Magnatech" or the "Company") of Robesonia, PA is a producer of highly engineered equipment and related parts used in the manufacture of high and medium-pressure reinforced hose. The Company's machines were used in the process of braiding, wrapping or winding a metal or yarn reinforcement on rubber hose used in a broad range of technical industrial and hydraulic applications. Magnatech focused its efforts on the design, engineering, assembly and installation of its equipment while outsourcing the manufacture of most of the sub-components used in its machines, making the Company the most efficient industrial company HRCP ever purchased.
Sourcing, Transaction and Opportunity
HRCP sourced the opportunity through its proprietary network of business advisors. Griffin Financial, a regional investment bank based in Reading, PA conducted an auction sale process of the family owned business. HRCP was selected as one of two finalists in the process due to its expertise in process equipment as well as its equity ownership proposal for management. While HRCP's ultimate bid was lower than the other finalist, the Firm was chosen as the best buyer for the business due to its enthusiasm for the prospects for the business, evidenced by its willingness to prepare the final bid in a compressed timeframe that the other party deemed unreasonable.
Magnatech had a worldwide market share and exhibited excellent growth prospects in China and India. In addition to new machine sales, international expansion would also increase the Company's highly-profitable aftermarket parts business. The opportunity to create value in the investment existed in two areas: supporting the Company with strong capitalization to allow for continued growth including further development of outsourcing partners and development of its parts and service business; and also to establish significant equity ownership positions for key managers for the first time.
Value Creation Management Incentives. HRCP put key managers in a significant ownership position where there was no manager stock ownership before. HRCP also implemented a supplemental equity incentive plan to allow for larger sharing of potential gains. With the leanest operations the Principals have ever seen in effect at the time of acquisition, there was no need for HRCP to implement culture change outside of management ownership.
Strong Capital Base for Growth. The Company's strong capital base during HRCP ownership enabled the company to pursue expansion opportunities in China and India. The HRCP-led board of directors encouraged sales expansion and development of the aftermarket business. The board also supported management's continued development of best-in-class outsourcing partners to fabricate the components required in a Magnatech machine. The Company's continued emphasis and development towards a true technical design and assembly operation, and away from metal machining and manufacturing led to continued margin expansion during HRCP's ownership of the Company.
Cash Flow. HRCP's emphasis on robust cash flow coupled with earnings growth and margin expansion led to a rapid de-levering of the Company. Magnatech's debt to EBITDA ratio was reduced from 3.8x at closing to 1.6x in just two years.
Supported international sales expansion
Supported further outsourcing of components
Initiated new management incentive compensation programs
Established management equity ownership programs
Significantly de-levered the company
Through rapid sales growth and margin expansion, Magnatech achieved its five year plan in just two years. With improved incentives and a Lean culture firmly in place, the Company's sales had grown 20% and margins had improved five percentage points in two years. In late 2007, HRCP selected Houlihan Lokey to auction the business for sale. A New York based family office was selected as the winning bidder. Most of the value creation in this investment came through earnings growth and debt repayment through strong cash flow. The Company's growth and margin improvement also resulted in multiple expansion.