Under the private equity ownership of Blue Wolf Capital Partners LLC, Gloucester Engineering Co. will get a new start as the film equipment manufacturer dramatically cuts its debt and emerges from Chapter 11 bankruptcy, a Blue Wolf official said.
Gloucester Engineering filed its reorganization plan Sept. 29 in U.S. Bankruptcy Court in Boston.
“One of the things that makes us very optimistic about the future is, the company's going to emerge with a much stronger balance sheet,” said Michael Ranson, a partner in Blue Wolf, in a telephone interview Oct. 12. He said the machinery maker could emerge from bankruptcy by the end of this year, or in early 2011.
Ranson also revealed that Blue Wolf — a New York private equity firm — learned about the financially troubled company from the International Association of Machinists, which represents workers at Gloucester Engineering. The company already has signed a union contract with IAM Local 1271.
He said Blue Wolf will quickly return the company to normal business practices and take a long-term approach to rebuilding the business. “We view Gloucester as a turnaround that's going to take a number of years to unfold. We're certainly not in this for a quick flip,” he said.
Blue Wolf has hired a search firm to find a new CEO for the company in Gloucester, Mass. John Sharood remains chairman and one of the owners, but he said he has not played a day-to-day role since Gloucester named a chief restructuring officer, Robert Sharp, in May. Ranson said Sharood reviews and signs court documents, “but when the company emerges from bankruptcy, his ownership in the company will be wiped out and he will no longer have involvement.”
If bankruptcy Judge Joan Feeney OKs the plan, the private equity firm's Blue Wolf Capital Fund II will own 95 percent of Gloucester Engineering. The other 5 percent would go to a group of unsecured creditors deemed “critical suppliers.” The list of critical suppliers will not be made public, Ranson said.
Unsecured creditors are owed a total of $13.6 million. Under the proposed reorganization plan, Gloucester Engineering will establish a fund of $514,000 to pay them back — an amount that equals about 3.8 percent of the claims.
Critical suppliers would get both the money and the ownership stake.
Boston lawyer Mark Berman, who represents the unsecured creditors committee, has said they are supporting the deal as the best way to keep Gloucester Engineering an ongoing business.
Companies designated as critical suppliers would agree to supply goods on credit. Ranson said it's important to get back to normal supply agreements. “For almost all of 2010, the company has been in cash in advance and COD for deliveries,” he said.
Even so, Gloucester Engineering has managed to continue building equipment. President Carl Johnson said the company recently received two orders, for a total of $5.2 million, for blown film equipment to customers in Southeast Asia and Europe. About midyear, officials announced that a seven-layer, cast-stretch film line was shipped to a packaging company in Malaysia.
“The company has paid its dues and, when it emerges from bankruptcy, I think the supplier base needs to recognize that it's a new day and needs to treat Gloucester like any other customer,” Ranson said.
Blue Wolf loaned the company $2 million in May and June, Ranson said. The private equity firm followed that up with a $6 million revolving line of credit through debtor-in-possession financing. Ranson said the company has not drawn down the entire DIP amount.
Ranson also said Blue Wolf has acquired the largest secured loan — $11.5 million to SMS GmbH, the Meinerzhagen, Germany, industrial conglomerate that sold Gloucester Engineering in 2007 to Sharood and Dick Murphy, partners in Mousam Ventures LLC of Kennebunk, Maine — together with senior managers from the machinery company. The buyers gave SMS a secured note for that amount, Ranson said.
Under the reorganization plan, Blue Wolf would convert its pre-bankruptcy secured debt, a total of $13.5 million, into equity ownership. Blue Wolf also would convert its financing into a revolving loan exit facility for $7.5 million.
Blue Wolf was attracted to Gloucester Engineering because, despite the financial woes, it is a leading global supplier of machinery for plastic film, Ranson said.
“We are the sponsor of the plan of reorganization and are committed to continuing to invest in the company, including in post-bankruptcy, to allow it to resume its position as a leader in the industry,” Ranson said.
Officials want to improve the aftermarket business, and have hired two additional people for parts and service — a key area, since Gloucester has an installed base of about 1,200 machines around the world, he said.
Ranson said Blue Wolf is strengthening its people resources, since a number of engineers were let go during the downsizing. The company has hired several new engineers in the last month and resumed its research and development efforts.
Meanwhile, to cut costs, the company is closing a machine shop in Gloucester and moving the operation into the headquarters plant. Ranson said Gloucester Engineering will continue to do in-house machining.
Gloucester Engineering has about 75 employees, most of them in Gloucester. A union official said 26 of the workers are represented by the IAM.
Blue Wolf's reputation in labor circles is how the firm found out about Gloucester. Mike Vartabedian, a business representative for IAM Local 1261, said the union sought out a buyer “because Gloucester Engineering was failing and we wanted to save our jobs.” The union contacted New Jersey labor lawyer Craig Livingston, who hooked Vartabedian up with Ranson.
Blue Wolf is only about 5 years old — and Gloucester is its first foray into capital equipment — but Livingston knew some of its people from his work doing investment banking for unions, when they worked together at other firms.
Ranson said some of the partners have decades of experience working with steel mills, paper mills and other unionized manufacturing operations.
“We treat labor as another constituent at the table. There's a middle road where both sides can benefit and it doesn't have to be contentious,” Ranson said.
Vartabedian would not reveal details of the contract, which the union approved Sept. 3. He said negotiations went smoothly. “We both knew that the company needed some changes, but they were reasonable in their demands and they've been very professional and pleasant to work with right now,” he said.
Meanwhile, Gloucester Engineering will not be exhibiting at K 2010, set for Oct. 27-Nov. 3, although key people will attend the trade show in Dusseldorf, Germany. Financial difficulties meant the company could not put a booth deposit down by the deadline, Ranson said.
It was at the last K show, in 2007, that Sharood and Murphy announced they had bought what was then called Battenfeld Gloucester. SMS wanted to sell its last plastics-equipment holding so it could focus on its core business of machinery for the steel industry.
Ranson said the sharp recession has hurt capital equipment in the three years since then. But he said many of Gloucester Engineering's problems were longer term.
For the past 10 years, Gloucester ran through a revolving door of people in the top spot of president and CEO.
“There also was a lack of financial resources, because this is a capital-intensive business and the company had been undermanaged for many years. The company had suffered from a lack of continuity and strategic guidance,” Ranson said. Carl Johnson agreed with that assessment.
But Ranson said that is going to change.
“We're really excited to be involved with this technologically leading company. It's exciting to be able to invest in an industry leader, but it's also exciting to save the 75 jobs there, and we're going to add to that,” he said. “We think that really great things are in store for this company.”