What attracted Sun to Exopack?
In 2005, we identified a small family business called Cello-Foil. That business had revenues of roughly $75 million, and profits of about $6 million. Clearly, the business was performing ok – 8 percent margins, roughly – but it was not performing as we thought it could, which was a margin nearer 10-12 percent. with a sales process that had some challenges, because there was one customer who accounted for a large portion of the revenue, and we saw an opportunity.
Fast forward to the beginning of 2010, and that business is now making over $850 million in revenue and over $100 million in profit, with a well-diversified customer base.
Why was a recapitalisation the right choice for the company – and for Sun?
When we think about exits, our position is that we want to return capital as fast as possible. That’s a no-brainer. We then ask ourselves: has the business reached its industry margins? Has it achieved its potential? If the answer to that question is yes, we’ve turned the business successfully. At that point we would consider an exit.
Another consideration that plays into the decision to recapitalise a company is: do we feel we can get a 30-plus percent increase on our carrying cost by holding the investment? If the answer is yes, then we continue to hold it. And that’s probably where Exopack falls. We’ve held it, we have created a lot of value, and we expect the business to continue to grow and create more value.
Sometimes recaps are perceived as an attempt to burden asset-rich portfolio companies with debt. Does Exopack fall into that category?
No. Because if you go back to Sun Capital’s basic value-add, our goal is always to improve the operations of the businesses we invest in. That’s what we do.
Taking a business from about $75 million in revenue to over $850 million in revenue – and from $6 million in profits to over $100 million in profits – shows that we have created value and improved the margins. It’s beyond just acquiring; it’s one-plus-one equals three.
As I said, philosophically, our goal is to return capital to our investors quickly. A recap of Exopack presented us with an opportunity to return capital, but also to continue holding onto a fantastic asset that we believe in.
When building a company like Exopack, how does Sun approach add-on opportunities?
I think the real litmus test of an add-on is: Can you integrate the add-on operationally into your business? Can you make it a fit with the corporate culture? Can you capture the synergies and build efficient facilities? Can you make it work within the larger company?
Sun generates a good number of investment opportunities from acquisitions that were not successful. The classic scenario is that one company acquires another company and the integration doesn’t go as planned; it requires significant investment of capital, and maybe the planned synergies aren’t fully achieved. Plus, the company leveraged up to do the acquisition, and now they’re in a bind. That is an opportunity for Sun.
What are some of the opportunities you see in the market now for special situations?
We see quite a few opportunities to invest in corporate carve-outs. After the global financial crisis, there are many companies – large corporations – that are looking to re-focus on their core business. As a result, there are opportunities to help them do that through divestitures. And often, when a large corporation divests, there is value we can add to the non-core business.