Geographical expansion, added capacity drive ICG’s add-on for Seaway Platform

‘Fragmented supply chain, sticky relationships lead to unique M&A opportunities in the medical device manufacturing space,’ said ICG’s Gregory.

Later this morning, ICG will announce it has acquired MME, a St Paul, Minnesota-based full-service contract manufacturer that provides injection molding, engineering, tooling and assembly for FDA-regulated medical and other products.

This is the first add-on for the Seaway Plastics Engineering platform, which ICG, headquartered in London, bought earlier this year from Tonka Bay Equity Partners. Seaway, based in Port Richey, Florida, is a provider of components and value-added services for the medical device, healthcare and specialty industrial sectors.

PE Hub spoke with Uzair Dossani, managing director of ICG’s North American direct private equity group, and Kevin Gregory, the firm’s healthcare sector lead, about the organic and inorganic growth levels this acquisition adds to the platform and about future add-ons.

“The thesis for Seaway was around finding a platform in this contract manufacturing space, leading with the medical device piece, and supporting the company through organic growth and M&A,” explained Gregory. “We closed Seaway in June and couldn’t think of a better first acquisition. At the highest level, MME is similar to what Seaway does, as it is also focused on highly engineered plastic processing, as well as value-added services.”

Dossani said the firm was looking for “great businesses with great management teams that operate in fragmented industries where we can help accelerate growth by investing to relax whatever constraints exist, between both M&A-driven and organic growth.”

“We’ve made a push in both those areas,” said Dossani. “So, we’re making investments to grow organically, as we recently hired a new head of sales; we’ve committed capital to fund capacity expansion, and then inorganically, obviously, with the acquisition of MME we have made nice progress in pushing forward the M&A thesis.”

This move hits on three key points that the firm wanted to achieve after buying Seaway. The first of which, is geographical expansion.

Kevin Gregory and Uzair Dossani, ICG North American direct private equity

“There’s lots of innovation, particularly within the medical device customer segment, and some of the large medical device OEMs are based in Minnesota and the broader Midwest,” Gregory said. “There’s a lot of innovation in our customer base, primarily medical device manufacturers. I have also learned that in this space, geography really does matter with these types of businesses and customers. We ship all over the country and all over the world, but customers like being near their suppliers.”

The second reason is that MME adds complementary products.

“The clear majority of what MME does is in medical, but across the portfolio, there’s a range of interesting use cases,” said Gregory. “So just to pick an example, MME works on one of the components that make these extremely small, difficult to manufacture parts for blood collection devices that are used in cancer treatments, or components for continued continuous glucose monitoring for diabetes. And some of that is through more automated manufacturing, so MME is leveraging strong technology that serves interesting use cases.”

And the last component is added capacity.

“In June when we acquired Seaway, we talked about wanting to this to be about organic growth and for these businesses in manufacturing, capacity matters,” Gregory said. “We’ll almost double our capacity, as we’re adding over 100,000 square feet with MME, but we are not nearly doubling revenue, so we’ve got plenty of room to sell into the space.”

He added that this latest investment also added one third of that capacity in cleanroom manufacturing, “which moves the needle on the medical side.”

“Cleanrooms are made to a very specific set of standards for medical manufacturing, which is really important to us, as we’re focusing on not just getting bigger, but also adding high-quality capacity,” he said.

Accelerant

When asked about potential organic growth being capped by economic challenges and the volatile investing landscape, Dossani said the firm likes businesses with “both levels” but that “inorganic growth is an accelerant.”

He added: “Inorganic growth can be more controllable, and you’re not relying on the market for a big chunk of the growth like you are with organic growth. And depending on the multiple that you’re paying for the add-ons, these can be accretive to our equity returns. So those are all the reasons why we and other private equity sponsors really do like doing add-on M&A if it’s accretive and a good strategic fit.”

On the other hand, organic growth “is quite powerful because it’s cheaper.”

“So, if you can invest in additional sales resources or invest in growing capacity and drive organic growth, there’s a lower upfront cost with doing that. So that’s why we do think both are important,” explained Dossani.

He said that heading into a potential recession, it’s nice to have both organic growth and M&A available as levers, because “organic growth often slows a little bit in a recession and you might find more willing sellers in a recession.”

He added that one of the main reasons ICG was attracted to both Seaway and MME is the high medical exposure of the businesses.

“What we’ve seen historically is that demand in this sector – given the demographic trends and nature of the underlying end markets or surgical procedures – can be recession resistant,” he said. “And unlike other industrial businesses, growth doesn’t typically go negative in a recession; organic growth slows, but it doesn’t go negative. And at the time we made the original platform investment in Seaway, it was clear there was some macro uncertainty. And one of the things that got us comfortable making the investment is the stability on the underlying end markets here.”

Opportunity for continued M&A activity in this space is ripe, according to Gregory.

“I’d say in medical device manufacturing, these are very sticky relationships, and the supply chain is very fragmented,” he said. “So, we think that from a healthcare lens, the M&A opportunities are quite unique. I’d say, the opportunity to do more M&A is at the better end of what we see across healthcare.”

Getting the first add-on done quickly makes the next one easier, explained Gregory.

“We’ve got additional scale and capabilities in an attractive new geography, so this first deal had everything we looked for,” he said. “And to do this right out of the gate, I would use the term momentum to describe how we’re thinking about our next steps. We did our first add-on quickly, but it also feeds the organic component of our thesis, given the capacity the combined company now has. We’ve got a new head of sales to help drive this organic growth. There is a self-reinforcing element of M&A supporting the organic story, and we remain focused on both dimensions as a result of starting with a deal like MME.”

Dossani expects to continue to do add-ons throughout the hold period.

“And we have, as you might expect, a pipeline of opportunities,” he said. “We are always looking to add to that pipeline, leveraging intermediate relationships and our CEOs, sector knowledge and relationships as well.”