Deal Mechanic Electra Partners Allflex

There are two aspects of UK-based Electra Partners’ investment in animal tagging business Allflex that make it unusual, by private equity standards. The first is that when Electra sold the business to UK buyout firm BC Partners last year, it had owned it for almost 15 years. The second is that following the sale, Electra had reaped total proceeds from the deal equivalent to 15 times its original investment (and it still owns a 15 percent stake).

The deal was led by Electra’s deputy managing partner David Symondson; a former student (and current part-time practitioner) of agriculture, he believed that tagging would be a growth area as governments started to crack down on the provenance of slaughtered animals. “The concept of traceability was coming into the food industry at that time,” he recalls. “We’d had the BSE crisis, and we were about to have foot-and-mouth. These events helped to convince legislators that we needed a more rigid identification scheme – and that would at some point lead to proper traceability.”

At the time, Allflex’s potential was clearly not evident to all and sundry. Previous owner Goldman Sachs – an organisation not known for looking gift horses in the mouth – had decided it was time to cash out. And when Electra tried to raise debt for the deal, it struggled to persuade the banks, who were dealing with the fall-out from the Russian banking crisis and (in some cases) were unconvinced about the company’s business model.

However, Symondson eventually got RBS on board, and in December 1998, Electra bought the business for $160 million. By the time it sold the business in 2013, after three separate refinancings, it was valued at $1.35 billion – and had yielded total proceeds of $836 million to Electra and its clients. So what exactly did Electra get right?

1. EXPANDING INTO NEW AREAS

When Electra first invested in Allflex, most of its revenue came from plastic tags, which were manufactured in Vitré in northern France (where the management team had originally bought the operation out of its New Zealand parent).

Electronic or RFID tags – which contain transponders that allow for easier tracking – were already on the company’s agenda in 1998. But they became a more significant part of the business over the coming years, as Allflex responded to different regions’ efforts to outdo each other on traceability. The EU initially led the way on cattle tagging, but it was soon surpassed by the likes of Australia, which was an early adopter of RFID as it looked to export more beef to (to Japan in particular). South America was also a big growth area.

This focus on RFID also allowed Allflex to expand its offering beyond cattle. It now tags sheep and pigs, also for food safety reasons (RFID is now mandatory for sheep in the EU, for instance). It puts chips on salmon in North American rivers, for conservation reasons. And it’s even started to put chips on domestic pets, as various countries have tightened their legislation.

This required a big expansion of the company’s manufacturing operation: as well as doubling the size of the French plant, Allflex opened up new sites in places like Brazil, China and Japan (more recently it also added a plant in Poland). All told, it now operates in 50 countries.

Some of this growth was organic. But Allflex has also been on a buying spree in recent years, snapping up 15 complementary businesses. Symondson says Electra played a key role in this. “The company developed its own expertise in buying these businesses, but we certainly pointed them in that direction.”

2. UPGRADING MANAGEMENT

During Electra’s 15 years of ownership, Allflex had no fewer than five different CEOs.

“Initially the management was very entrepreneurial – but as the company got bigger, the right processes had to be put in place,” says Symondson. Clearly the manufacturing operation became more complex – but there was also the challenge of building the right relationships in new markets. “The business is not homogenous; the route to market is different in every country. I always think of it as a confederation of lots of small businesses under one leadership – but that leadership is very important as we’re in regular contact with the technocrats, assisting them with the planning of their schemes.”

Towards the end of Electra’s investment period, however, when it was starting to think about a sale, Symondson felt it was time to be more aggressive again. “Agriculture was coming out of a 20-year depression, prices were jumping upwards, profit was returning … Livestock farming was being modernised everywhere you look. This opened up lots of opportunities for Allflex.” This required a change in the management culture – which led to the appointment of a new CEO.

3. BEING PATIENT

Because it doesn’t invest from a typical closed-end fund, Electra had the luxury of not having to sell after five to seven years. That was helpful in an industry that relies on regulatory changes that often take many years to play out. It also allowed the firm to refinance three times, on steadily better terms, and wait for the right offer. “Any other private equity firm would have refinanced it once and then sold it – but we saw the future value, so we refinanced to allow us to maintain control.”

This long-term outlook was also helpful from an operating point of view. “The advantage Allflex has is its manufacturing capability; you have to be able to supply an entire country[’s tags] in one go. So you need to make the judgement to manufacture those stocks in advance. That requires a high level of working capital – but without it, you lose your competitive edge. Local companies can’t make that sort of bet.”

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So why did Electra choose to sell when it did? “As a portfolio investment of Electra, It was becoming too large – it was in danger of going over our 15 percent threshold, so we had to sell down,” explains Symondson. “We could have done a refinancing – and we were running that process in parallel. But the likelihood was that Allflex needed another big equity investment in order to buy a new [business line], which would make it larger and riskier again. Plus we got a very acceptable price.”

What Electra did do, however, was re-invest $85 million to retain a 15 percent stake in the business. “We were still attracted to the continuing story – and the structure BC put in place was also attractive.”

DNA identification is the next big thing for Allflex, he suggests. When the tags go into an animal’s ear, it punches out a small bit of flesh; this goes into a special container and can be sent back to the lab for testing, potentially helping the authorities to weed out certain genetic diseases from the food chain. RFID tagging is also likely to become even more widespread. And there should be plenty of opportunity in countries that are trying to bring their agriculture up to international standards (as Turkey is in its efforts to join the EU, for example).

So there could be a lot more upside from Allflex yet. As Symondson says, after a slow first few years, this is a deal that has well and truly confounded expectations. “It was a bit of an ugly duckling – the City didn’t want to know about this boring farm business. But it became the swan.”

STATS:
$160m
Entry price in 1998
$1.35bn
Sale price in 2013
15x
Electra’s multiple on investment
60kg
Average annual beef consumption per capita in Uruguay in 2012
(the highest in the world)