AMPORTS, Inc. (“AMPORTS”) operated at four United States portside locations and was the largest portside vehicle processing business in the country with customer relationships dating back over 30 years. AMPORTS was established in the late 1950’s as R.G. Hobelmann in Baltimore, MD, where the company processed and repaired automobiles arriving at the Port of Baltimore. In 1996, Hobelmann and its subsidiary, Crown Auto Processing, were acquired by Benicia Industries of California. Together, the businesses were renamed American Port Services (a.k.a. AMPORTS). In 1998, AMPORTS was acquired by Associated British Ports, PLC. Today, the company serves as an important link in the automotive supply chain, providing foreign and domestic customers portside value-added services, including receiving, inspection, storage, accessory installation and logistics packages.
Investment Highlights
- Significant Barriers to Entry in North America. The portside vehicle processing industry requires a significant upfront capital investment in order to enter the market. In addition, with only a finite amount of automotive port space, particularly with the increasing amount of port space being allocated towards containers, it would be extremely difficult for a competitor to obtain the appropriate space and enter the market.
- Industry Leading Market Share in North America. AMPORTS controlled three of the six automotive processing ports on the U.S. East Coast; one of the nine, but by far the most active by volume, automotive processing ports on the West Coast; and all four of the automotive processing ports in Mexico.
- Ownership of the Underlying Real Estate. Unlike AMLI, Inc. (“AMLI”), one of Lincolnshire Equity Fund II, L.P.’s portfolio companies, AMPORTS owned the land on which it operated. Not only was the land itself valuable, but ownership of the real estate allows for AMPORTS to collect the port fees that every automobile that leaves or enters the port must pay.
- High Recurring Revenue. On top of the port fees that AMPORTS collects, the company was able charge an inspection fee for every automobile it processes. In addition, the chances of end-market erosion are low and could only occur if automotive companies could perfectly predict local consumer demand and produce the automobiles in each of these local markets.
- Proven and Experienced Management. The AMPORTS’ management team had an average of over eight years of experience in the port logistics business.
- Geographic Location. AMPORTS had strategically located processing facilities on both coasts of the U.S. and Mexico. Furthermore, AMPORTS’ numerous portside locations do not make them dependant on any one car manufacturer or plant, as might be the case with an inland facility.
Transaction Sourcing
Lincolnshire sourced the investment through AMLI. Lincolnshire became familiar with the industry through its prior investment AMLI, and it was through AMLI’s management that Lincolnshire was able to negotiate the acquisition of AMPORTS.
Post-Acquisition Value Added
- Integration of AMLI in Baltimore. AMLI, a smaller portside vehicle processor than AMPORTS, operated at three Mexican port locations in Altimira, Mazatlan and Lazaro Cardenas and one United States port location in Baltimore. AMLI and AMPORTS operate at adjacent locations in Baltimore and were previously direct competitors. AMPORTS and AMLI were merged, and their operations successfully integrated, leading to significant cost savings that instantly unlocked value for Lincolnshire. The integration led to improved operating margins by relieving current capacity constraints at AMPORTS’ facility and more effectively utilizing AMLI’s processing capacity.
- International Expansion. Lincolnshire was able to leverage the AMPORTS’ dominant position and strong customer relationships in the U.S. marketplace to solidify and grow the business in Mexico. AMLI was also able to use AMPORTS’ market position as a platform to expand its international operations in Mexico.
- Increased Efficiency. By focusing on both margin and throughput, Lincolnshire was able to maximize profit by finding the optimal balance between the two leading factors affecting revenue and operating margins. In addition, Lincolnshire sought to reduce the number of “touches” for each automobile, thereby reducing the labor cost for each product.
- Repositioning as Infrastructure Asset Upon Sale. With the underlying land value and high recurring revenue, Lincolnshire was able to strategically reposition AMPORTS as an infrastructure asset (i.e. akin to a toll bridge for automotive imports and exports into and out of North America) during the sale process in order to garner a higher exit multiple and price.
Valuation/Investment Results
AMPORTS generated proceeds to Lincolnshire, representing a substantial multiple of invested capital.
Company Overview
Bankruptcy Management Solutions, Inc. (“BMS”) was engaged in the business of providing Chapter 7 bankruptcy trustees and certain other fiduciaries (“U.S. Trustees”) with computer hardware, support services, and proprietary software products. These products and services are designed to assist the U.S. Trustees in managing asset liquidations under Chapter 7 of the Bankruptcy Code, effecting creditor distributions and producing reports required by the Bankruptcy Court and the Executive Office for U.S. Trustees.
Investment Highlights:
High Barriers to Entry. To be successful in the industry, a company must have (i) significant bankruptcy expertise in order to create the specialized software and service for the Trustees; (ii) software that is integrated seamlessly and securely with the court record systems and a depository institution; and (iii) sufficient customer base and levels of balances in order to generate adequate revenue to (a) cover the fixed costs of the business, (b) support the development of the software products and to (c) fund the purchase of the hardware provided to Trustees.
- Leading Market Share. BMS was the market leader in Chapter 7 case management software services, in terms of customers – with over 840 total Chapter 7 trustees – and in terms of balances – with approximately $2.4 billion in Chapter 7 balances during Lincolnshire’s ownership of the company. BMS has an estimated 52% of the market share, and Epiq Systems, Inc. is the next closest competitor with approximately 43% of the Chapter 7 market based on customers.
- Customer Allegiance. BMS’ customer base was extremely loyal, as confirmed by an independent study concluding that only 7% of Chapter 7 bankruptcy Trustees will consider switching vendors. The industry propensity to avoid changes is a function of the barriers to entry limiting effective entrants into the market, the quality product offering provided by the present participants, and a natural inertia developed by risk-averse Trustees and administrative support staff who are disinclined to learn new systems and risk potential complications resulting from data conversion into new programs.
- Upside Opportunity in Improving Rate Environments. BMS enjoyed several areas of revenue and profitability growth associate with improving interest rate environments from the time Lincolnshire purchased the business, to the time Lincolnshire sold it. Further, through diligence before its ownership, Lincolnshire developed a clear understanding of the untapped value of the balances controlled by BMS and structured the transaction in such a way to take advantage of this latent value.
- Long-Term Growth Profile of the Industry. BMS benefited from the long-term growth outlook for consumer and corporate debt that, notwithstanding typical cycles, was projected to increase over the long-term and give rise to continued chapter 7s.
Transaction Sourcing
The investment was sourced through personal contact directly with the management team with a member of the execution personnel.
Transaction Summary
Fund II, in partnership with management, acquired the assets of one of the JP Morgan Chase Bank’s (“JPM”) to form BMS. JPM sold BMS through a management buyout in order to focus on its core trust division.
Post-Acquisition Value Added
Lincolnshire entered into an 8-year agreement with JPMorgan, which provided:
For a monthly payment from JPM to BMS;
A co-marketing arrangement to market the joint services of BMS and JPM;
The right, subject to certain restrictions, to move the balances to an alternative depository institution; and
Opportunity for selective acquisitions of smaller market participants.
Valuation/Investment Results
During its period of ownership by Fund II, BMS considered a number of strategic initiatives based on the Company’s expertise in the bankruptcy market and ability to manage an effective and efficient software-based processing platform. These opportunities included:
Expansion of the business into the broader debt recovery market (credit reporting, asset auctions, etc.):
Assisting market participants to record and share information electronically;
Provision of outsourcing services for case management processing (including class action lawsuits and other areas where there is a need for administrative or asset disbursement tracking and support);
Expansion into other bankruptcy areas such as Chapter 11 cases; and
Expansion in debtor education programs, which were spurred by change in bankruptcy legislation that occurred in October 2005.
In January 2005, BMS was recapitalized in a leveraged transaction, which allowed Lincolnshire to return a significant premium on invested capital. Lincolnshire exited the investment in July 2006, upon sale of the business to an entity owned jointly by Charlesbank and Ocwen Financial, resulting in another significant return on invested capital.
Transcraft Corp. is the leading designer and manufacturer of high quality flatbed trailers with over 24% market share. Founded in 1963, Transcraft has earned a reputation for producing high quality, innovative products, incorporating superior payload capabilities and lightweight designs. The company has expanded its market position by building the largest dealer network in the industry. Transcraft continues to focus on enhancing its competitive advantages through product innovation, quality manufacturing and expansion of its dealer network.
Company Overview
Riddell Sports Group, Inc. (“Riddell” or the “Company”), is a leading provider of branded sporting goods, services and collectibles. Riddell’s core business is the design, manufacturing, marketing and reconditioning of football, baseball, lacrosse and other sporting equipment for institutional customers. The Company targets educational institutions such as colleges and high schools and local organizations in the youth market. The Company’s core Riddell® brand dominates the football market with the Company being both the largest football helmet manufacturer (approximately half the market for total helmets) and the largest football equipment reconditioner (52% share), making Riddell the leading player in the football helmet market.
Investment Highlights
- Leading Brands, Market Share. The Company’s superior brand recognition enabled Riddell to build a leading market share position in its respective markets. Riddell brand football helmets and protective athletic equipment, along with its reconditioning services, are used by over 50% of all high school and collegiate football players as well as by approximately 85% of NFL players under a long-standing agreement, which continues through 2014.
- Proprietary Sales Force. Riddell was the only national, factory-direct marketer of athletic products and services in the team sports market, which allows the Company to bypass independent, non-exclusive dealer networks used by its competitors. The Company’s direct “on-the-ground” sales force provides many advantages, including better service, faster turnaround, competitive pricing, immediate market feedback and product testing.
- Unique, Recurring Revenue Marketing Model With Access To Attractive Market. The Company successfully developed and implemented a year-round, integrated, relationship-based marketing strategy that created long-term relationships with its customers. This approach built the value of its strategy by offering customers the ability to recondition equipment during the off-season, while also selling new protective athletic equipment, practice ware and game products. While the direct sales force markets equipment and service offerings, the Company also markets its products directly to end-users via catalogs, targeted direct-mail pieces and its Internet sites.
- Sustainable Growth Opportunities. There were strong underlying growth characteristics in each of the markets serviced by the Company, including significant growth in current markets and products, expanded product-line growth, growth in sales force and improved operating margins.
- Revenues Resistant to Economic Swings. Because the majority of Riddell’s sales were through the institutional channel, the Company was resistant to declines in consumer spending and confidence. High school and college sports budgets do not fluctuate dramatically from year-to-year.
- Expertise in New Product Development. Riddell has a long history of product innovation including the first plastic helmet (1940), first chin strap (1940), first plastic face mask (1940), first air cushion helmet (1973), first carbon steel face mask (1977), first self-contained inflation helmet (1991) and most recently the Revolution (2002), the first helmet using new technology designed with the intent of reducing the risk of concussion.
- Efficient Manufacturing and Outsourcing Capabilities. The Company’s ability to strategically outsource various operations allows it to focus on new product development and inventory management, while limiting capital commitments. Similarly, the Company maintains reconditioning facilities throughout the United States, within easy shipping distance of its customers, thereby allowing the Company to rapidly recondition or repair athletic equipment.
- Experienced Management Team. With Riddell, Fund II backed a strong management team that with Lincolnshire’s assistance brought heightened focus to its core business and successfully launched a major new product.
Transaction Sourcing
Lincolnshire sourced the investment through its network. Lincolnshire was contacted after an auction process failed and the board of directors of Varsity Spirit Corp. pursued other exit alternatives.
Transaction Summary
Fund II joined with the management of Riddell to purchase 100% of the outstanding stock of the Company for a purchase price of $73.0 million.
The stock was purchased by a newly formed limited liability company, Riddell, LLC. The transaction was structured such that Fund II and management acquired the entire Riddell business excluding Varsity Spirit. The purchase price represented a 5.8x multiple of trailing EBITDA.
Post-Acquisition Value Added
- New Product Introduction. Lincolnshire developed an action plan and time table for the introduction of a new product, the Revolution helmet. The Revolution helmet was designed in collaboration with the NFL for the purpose of enhancing the ability of a football helmet to protect against concussions. This was the first new football helmet introduced to the industry in well over a decade.
- Implementation of Public Relations Campaign. In order to support the new product’s introduction and maximize sales tools to company salesmen, Lincolnshire spearheaded a public relations campaign that aided in the success of its new product. The Revolution helmet was ranked above the introduction of Vanilla Coke in certain public relations industry rankings for new product introductions.
- Reduced Operating Expenses. Lincolnshire re-oriented the consumer products line with the new management by substantially rationalizing stock keeping units (“SKUs”), reducing R&D expenses and extending distribution, resulting in over a 100% improvement in EBITDA.
- Enhanced In-House Capabilities. Lincolnshire negotiated and supported the transition from outsourced football uniform supplies and inventory management to in-house source and inventory management. This provided an additional product line and avenue of profitability for the Company to sell through its sales force and in support of the Company’s customer relationships.
Valuation/Investment Results
Riddell was sold in June 2003, two years after being acquired by Lincolnshire Management's Fund II. Lincolnshhire's investment resulted in a threefold increase in capital invested by the Fund. The return was a result of a change in strategy implemented during Lincolnshire’s ownership leading to a substantial improvement in performance and valuation. As a result, the Company’s financial performance and future expectations improved substantially supporting a significantly higher exit valuation. The effect of debt amortization during Fund II’s two years of ownership provided additional return.