By: Bill Bregar
September 28, 2012
TORONTO (Sept. 28, 2:20 p.m. ET) — Canadian private equity firm Onex Corp., which is buying KraussMaffei AG, has experience in plastics machinery — selling Husky Injection Molding Systems Ltd. last year for a big payday and then buying Davis-Standard LLC.
David Mansell, an Onex managing director, said the company has no grand strategy to buy machinery companies, although the firm now has a good understanding of the sector. Instead, he said Onex looks for world-class companies run by active managers with a strategic mission that fits with Onex.
He said KraussMaffei unit companies will remain intact.
Onex announced Sept. 26 that it plans to buy the world’s largest manufacturer of plastics equipment for 568 million euros (US$732 million). That’s much less than the 700 million euros that media reports said the seller, Chicago investment firm Madison Capital Partners, was hoping to get. Several Plastics News sources confirmed the 700 million euro target price.
Mansell declined to comment on the asking price. Larry Gies, Madison Capital Partners’ president and CEO, did not return telephone calls seeking comment.
The announcement ends industry speculation about an imminent deal for Munich-based KraussMaffei group, which generated record order income of 1.1 billion euros ($1.5 billion) for the fiscal year ended Sept. 30, 2011.
Onex said KM’s revenues were about 1 billion euros for the 12 months ended June 30, 2012.
After 3½ years of ownership, Husky became a lucrative investment for Onex, which is traded on the Toronto Stock Exchange. Onex received net proceeds of $1.8 billion, providing a gain of about $1.2 billion, a 36 percent rate of return. Onex’s portion of the net proceeds from the Husky sale was about $583 million.
But machinery industry sources say KraussMaffei, a broad-based machinery manufacturer that has been private-equity owned for 10 years, is much different than Husky, and will be harder to improve financially for another big payoff down the road.
The KraussMaffei machinery group employs 4,000 around the world building injection molding machines, extruders and reaction injection molding machines. Brands include KraussMaffei and Netstal injection presses, KraussMaffei Berstorff extruders and RIM machines for polyurethane.
Toronto-based Onex said the transaction should close by March 31.
Mansell, called KraussMaffei a “global leader in each of its three segments, with a decades-long reputation for technology and quality.”
“We look forward to working with Jan Siebert and his management team to further build on the company’s market-leading position,” Mansell said in prepared comments.
KraussMaffei is the first European-based investment for Onex Partners III, a US$4.7 billion fund run by Onex that will inject US$340 million into the business. In June, Onex announced it was opening its first European operation, a London office.
Mansell said it makes sense for Onex’s first investment into a European-headquartered company to be plastics machinery. “It would have been unusual if our first acquisition would have been new to Onex,” he said.
KraussMaffei operates factories in Germany, Switzerland, Slovakia and China.
In a statement KraussMaffei said it had made “successful steps to strengthen the business in its core markets as well as to expand its global presence in growing markets, particularly the Bric countries [Brazil, Russia, India, China] and Asia.”
“We’re very pleased to be partnering with Onex given its track record and experience in our industry,” said Siebert, KraussMaffei’s CEO.
Madison Capital bought KraussMaffei in 2006 from Kohlberg Kravis Roberts & Co. KKR had purchased the machinery conglomerate in 2002 from Siemens AG.
Siebert noted that Madison Capital supported the company through the global economic crisis in 2008 and 2009.
“I would like to thank Madison Capital for a reliable and trustful partnership over the last six years,” he said.
Industry sources told Plastics News that three private equity companies were involved in the final stages, two from North America and one from Europe. Recent press reports had said an unidentified Chinese machinery group was poised to buy KraussMaffei. Sources told Plastics News that a Chinese company was involved at an early stage of the sale process, but not at the end.
What’s in store?
Now that the announcement has been made, industry attention shifts to the future. The major news will cause a buzz at an upcoming trade show in Germany, Fakuma 2012. What will Onex do to boost the value of KraussMaffei?
One machinery source spelled it out: “What is really going on with this group? To continue with the current strategy, or are they really making a move in some other directions?”
Some of the obvious questions: Would Onex sell any part of the group, for example, Netstal, the Swiss injection press business focusing on thin-wall packaging and PET preforms? Or will Onex merge the Berstorff extrusion operations in with Davis-Standard?
The answer is no, Mansell told Plastics News.
“We don’t have any plans to break up KM,” he said.
Private equity companies are typically closemouthed. But Onex is a different animal: a private equity company that is publicly traded, so some financial information about KraussMaffei will be available.
For now, Mansell declined to comment on an industry source’s claim that the 568 million euro purchase price is six-times KM’s earnings before interest, taxes, depreciation and amortization.
Onex has a track record in plastics machinery, by owning Husky, a major maker of injection presses, hot runners and robots.
Under Onex ownership, Husky made some big changes from the days when founder Robert Schad owned the Bolton, Ontario, company. Onex bought Husky in late 2007 from Schad and his wife, Elizabeth, and other shareholders. Under Schad, Husky had expanded from its roots specializing in PET preforms and thin-wall products, to get into a broad-line supplier making large-tonnage machines for automotive and other new markets.
The following year, Husky stopped making big machines, and later ended large-press manufacturing at its factory in Dudelange, Luxembourg. The company put its automotive technical center in Novi, Mich., up for sale.
Schad, a strong-willed entrepreneur, had invested heavily in expanding into a broad machinery offering. He pumped huge money back into the company, building technical centers around the world and even creating a giant 8,000-ton press to demonstrate the possibilities in automotive molding.
“Husky, they lived in luxury,” said an executive at a competing machinery company.
Husky also owned many of its own assets, giving the private equity owners the option of selling, then leasing back the buildings to improve the balance sheet, sources said.
That made it easier for Onex to narrow the focus of Husky, back to its strongest areas of packaging and medical. Husky was a “pure play” investment into those growing areas, with a large market share.
“Bob Schad had a lot of luxury built into the company and that was some low-hanging fruit to improve the situation of the company,” the source said. “And I think the KM situation was a completely different one.”
A decade of ownership by two private equity companies, Madison Capital and KKR, has wrung a lot of costs out of KraussMaffei, the source said.
Also, at Husky, Onex trimmed costs to get the financial numbers up, to maximize the eventual selling price, said a former Husky middle manager who was laid off in the downsizing.
“Onex had two strategies,” he said. “One was you got to get EBITDA, because that’s the driver that gets you their price. Due to that, they said we’re going to cut any product that isn’t making a certain margin.”
Mansell acknowledges that Onex gave Husky a focused approach. But he said Onex boosted research and development spending and invested in increased capacity in China and a factory in India. “We very much saw ourselves as business builders,” he said.
KraussMaffei is not the same as Husky. Mansell said KraussMaffei has unique strengths in the breadth of its technology. In recent years, KM engineers have developed systems that can combine injection molding, extrusion and RIM in a single process.
“We think there’s an opportunity to run that company as one large business, rather than four divisions,” Mansell said. He said KM management will continue to coordinate sourcing, and sales and service.
One example is already happening in the United States. Netstal Machinery Inc. is moving from Devens, Mass., to Florence, Ky., the North American headquarters for the KM group. Also, KM group in Germany and Netstal in Switzerland are combining their marketing functions and pooling their engineering. The two units are maintaining independent manufacturing.
Should the industry expect to see more moves like that, under Onex? Mansell said he did not want to “get in front” of specific plans.
“That sort of consolidation is the type of moves that the current management team is implementing for greater global efficiency,” he said.