US mid-market: Back from the red

The year is 2008 and the sky is falling in. US house prices are plummeting and troubled borrowers have trouble selling their homes to pay off mortgages. Government-sponsored mortgage enterprises Fannie Mae and Freddie Mac are seized by the federal government and a recession grips.

Before the impending crisis, Toronto-headquartered Brookfield Asset Management had thrown a C$225 million ($181 million; €153 million) lifeline to Canadian bathroom-related products maker MAAX. The senior secured loan brought the five-decade-old manufacturer, established by the Poulin family of Quebec, into Brookfield’s purview.

Within one year of Brookfield’s debt investment and at the height of the US housing crisis, MAAX’s balance sheet was looking unsustainable and the company filed for bankruptcy protection. The development did not put Brookfield off; rather, the firm saw an opportunity.

“[MAAX] had a tremendous franchise in Canada, it had the largest market share for its product category across the country, and at the time had demonstrated significant growth in the US,” says Peter Gordon, a managing partner in Brookfield’s global private equity group. “We thought its prospects at the time and the fundamental attributes were quite good.”

Brookfield then sponsored a pre-arranged plan to support the company’s quick emergence from bankruptcy protection, acquiring 100 percent of MAAX from a consortium of private equity investors led by JW Childs Associates in a debt-for-equity swap through its 2006-vintage $1 billion flagship private equity fund BCP II. According to media reports at the time, the deal was valued at around C$225 million.

1. STRENGTHENING LEADERSHIP

“It’s 2008 and we were right in the middle of the US housing crisis,” Gordon explains. “We were facing a very uncertain outlook. We had falling revenues, excess manufacturing capacity, and that excess capacity was growing on a monthly basis as [MAAX’s] sales were falling. As a result, we had high overheads.”Strengthening leadership

The team also found MAAX had a depleted product pipeline. “It was quite a challenging situation,” Gordon recalls.

Brookfield first set about revamping MAAX’s leadership team and creating a culture that was performance-based and results driven. It seconded one of its most senior operating partners, Pierre McNeil, as chief executive for the first two years, and in 2011 brought on Mark Gold, a former Black & Decker executive, as chief executive. Gold’s leadership and credibility allowed MAAX to attract strong management, sales and marketing professionals who would not have otherwise joined a company that had just come out of a restructuring process to avoid bankruptcy.

Brookfield encouraged Gold to build a team from individuals in his personal network and to execute a business strategy focused on the customer, and also installed one of its younger team members as chief financial officer.

2. OPERATIONAL EFFICIENCY

The team set about redesigning MAAX’s operational structure and reduced its number of manufacturing plants to eight from 13. In addition to reducing manufacturing and corporate overheads, Brookfield focused on eliminating “all the duplication we could find”, according to Gordon. The team eliminated the money-losing international business that the company had initiated, such as its European factory.

“We looked at our cash margins, by customer, product and geography,” Gordon says. “We began to really understand where we were making money and where we were losing money. It’s surprising the number of companies we come across who don’t actually know [that].”

Brookfield also reduced staff numbers by 25 percent in the five years to 2012 and found cost savings by ensuring it was using materials to their optimal efficiency.

3. PRODUCT DEVELOPMENT

Brookfield’s commitment to a long-term plan during a period when the company was losing money was critical to MAAX’s turnaround.Product development

“On the surface of it, you think of MAAX being a company that manufactures bathtubs and showers, but if you only think about it in a very simple manner, you miss the subtleties and sophistication required to be successful,” Gordon says. MAAX sold multiple products in two geographies, through two distribution channels across several price points. Canada and US are also “very different markets”, according to Gordon.

Brookfield installed a team to focus on research and development for new products in three locations and introduced an online data collection and analysis system to spur new ideas.

Examples of these new products include its customisable ModulR free-standing bathtubs, as well as a pre-manufactured shower kit with realistic tile walls. Installable within four hours, the kit was received exceptionally well by the industry in 2015 and 2016 due to its time and cost value proposition, Gordon says.

New products kept MAAX relevant to its customers during challenging market times, and the company benefited from a multiplier effect as the market emerged from the global financial crisis. “New products also gave us the opportunity to increase sales volumes, set higher prices and generate higher margins,” Gordon says.

When Brookfield first acquired MAAX, new products accounted for 7 percent of its revenue. By the time it was sold to American Bath Group in January 2017 they had accounted for 40 percent of revenue the previous year and had generated C$144 million of aggregate revenue in the five years to 2016. This enabled MAAX to grow its US market share and its total revenue more than doubled over the same time period.

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After almost 10 years of being involved with MAAX and working with the company through the difficult years in the aftermath of the US housing market and global financial crises, Brookfield’s hard work was beginning to pay off. The company was debating internally about when to sell MAAX when it received an unsolicited offer from American Bath, which was owned by Lone Star Funds.

American Bath had the best fit with MAAX and over a short period of time Brookfield negotiated a comprehensive agreement, with a deal signed in December 2016 and closing in January. The firm declined to comment on its exit multiple, but based on media reports and documents disclosed by Brookfield Business Partners, the firm’s listed vehicle, Private Equity International understands the firm more than doubled its money on the investment, selling MAAX for around C$455 million.

Under Brookfield’s ownership, MAAX grew its EBITDA margins to almost 13 percent in 2016 from 3 percent in 2008. US sales rose 18 percent to around C$225 million under the firm’s five-year roadmap and MAAX had growth in 19 out of the 20 quarters to the end of 2016.

What did Brookfield take away from the nearly decade-long process? “The importance of product management and making a commitment to the business strategy, even though it sometimes requires you to invest additional capital at the most difficult times in the business cycle,” Gordon says.

MAAX remains the largest market share holder in Canada and is the third largest player in the US. As for its products, Gordon says he has even installed one of MAAX’s free-standing bathtubs in his own home.