After a MBO in 2000, automotive industry supplier TMD Friction had buckled under the burden of debts. As CEO Derek Whitworth tells In the Know, the subsequent restructuring culminated in a second private-equity-backed management buyout, paving the way for the creation of a global company.
When Derek Whitworth joined TMD Friction as CEO in 2005, the company had already been through an unsuccessful MBO. “The buyout took place in 2000 and it hadn’t worked out,” he explains. “The sale to management was backed by a private equity investor and the deal burdened the business with too much debt. By the time I arrived the ownership had passed to a group of mezzanine lenders.”
Recruited by a former employer, Derek’s primary task was to engineer a financial restructuring that would put Europe’s largest manufacturer of brake friction materials back on the path to profitability and a sustainable long term future. “The aim was to turn the company round over a period of about three years,” he recalls. “In fact it took us closer to five years.”
The restructuring culminated in another management buyout in 2009, when Derek – backed by London-based private equity investor Pamplona – bought the company out of insolvency. A corner had been turned. For the year ending December 31 2010, the company reported a 20% increase in sales over the previous year and a 160% rise in EBITDA. In December 2011, it was sold to Japanese competitor Nisshimbo to create a business with annual revenues in the region of €1bn.
Striking a good dealStill serving as CEO of TMD, Derek Whitworth has clear views on the pitfalls and opportunities presented by management buyouts.
In particular, he cautions that management teams should ensure they have a full understanding of the capital structures introduced and imposed by backers. “What you often find is that managers focus on the upside. They tend to focus on the amount of money they’re going to make while not spending enough time considering the downside. Private Equity investors can implement some very aggressive capital structures and you have to be aware of the implications of that.”
Derek’s first-hand experience of the problems that heavy leverage can cause, did not deter him from working with private equity backers when the time came to buy TMD out of insolvency. From an outsider’s perspective the second MBO was potentially more perilous than the first, given that the company was emerging from prolonged period of financial distress. However, Derek argues that the circumstances leading up to the buyout in some respects reduced the risk. “Because of the problems that the company had been through the valuation was relatively low,” says Derek. “And Pamplona was willing to do a deal that was equity only, so we avoided a debt burden. Those were de-risking factors.”
That said, Derek stresses that anyone buying a company out of insolvency should have a very clear perception of the value proposition – or to put it another way, what it is offering to the market and whether its existence is justified. In the case of TMD, importance to the automotive industry put it in a strong position to move forward.
In growing the company, the management, along with the private equity backers, were also considering exit opportunities for Pamplona. “We took a dual track,” says Derek. “Publicly we were moving towards an IPO (initial public offering) while also contacting potential trade buyers.”
It was those private conversations that led to the purchase by Nisshimbo. In addition to providing Pamplona with an exit, it was a deal that created a truly global company. “In the brake friction materials market, Japanese manufacturers sell to their domestic industry and to the US while European manufacturers are strong in Europe itself and the rest of the world. From Nisshimbo’s point of view the acquisition of TMD was driven by industrial synergies.”
It was an outcome that created a new powerhouse in the market targeted by TMD and Nisshimbo and one that justified Derek Whitworth’s confidence in backing the business.
Making an MBO Work
Understand the Value proposition of the company.
Make sure you fully understand the implications of the capital structure.
