Lineage Capital Loses, Then Wins Logistics Co.

Target: Veeco Inc.

Price: Undisclosed

Sponsor: Lineage Capital

Financial Advisor: Seller: BG Strategic Advisors, Sun Mergers and Acquisitions

Legal Advisor: Seller: McElroy, Deutsch, Mulvaney & Carpenter; Buyer: Ropes and Gray

Debt Provided By: TD Banknorth

Sometimes you have to lose to win. That’s what Boston-based buyout shop Lineage Capital learned in its recently closed purchase of Veeco Inc.

“We came to the first management dinner, and were told we were the lowest of ten” bidders, said Lineage Capital Principal Steve Glick. “We didn’t think we’d get asked back.”

Sure enough, Veeco, a family-owned business that imports and warehouses goods arriving in New York and New Jersey via plane, rail and ship, signed an agreement with another group. But the deal hit a snag after two weeks. A short time later, the owner circled back to Lineage and signed a deal with the buyout group, with minimal adjustments to its original offer. “The owner realized our approach and governance model was more appealing then he [originally] appreciated,” said Glick.

As it typically does with family-owned businesses, Lineage Capital chipped in the majority of the equity capital but left control of the five-person board with the seller. Of course, with any major issue, such as executive moves, acquisitions, or major financing, Lineage Capital gets its say. These situations typically require a majority vote that includes the firm’s representatives.

“There’s a big segment of American businesses that aren’t ready for and don’t want the barbarians at the gate,” said Glick. “They want to take chips off the table, they want to grow by acquisitions, but aren’t ready to sell 100% to a buyout group.”

Veeco’s strength is importing and storing footwear, apparel and accessories, and the success of the deal hinges on a kind of reverse-China strategy. As manufacturing moves off shore to China, imports from China have increased proportionately. Opening shop on the West coast to offer storage facilities for those goods will be a top priority, said Glick.

Ben Gordon, founder of Palm Beach, Fla.-based logistics advisory shop BG Strategic Advisors, advised Veeco. Hasbrouck Heights, N.J.-based Sun Mergers and Acquisitions also gave financial advice to the seller. Meanwhile, law firm Ropes and Gray advised Lineage Capital while McElroy, Deutsch, Mulvaney & Carpenter, gave Veeco legal advice. TD Banknorth, Veeco’s existing lender, supplied the all-senior debt package for the deal.

A quartet of Heritage Partners pros founded Lineage Capital: Brook Parker, Mark Sullivan, William McKinley and Lori Wood Cashman. Parker was also one of the four members that left the later stage equity unit of BancBoston, called Equity Partners, to form Heritage Partners in 1993. Glick, who came later, was formerly part of the Heritage Partners team that bought Bennett Footwear and later sold it to Brown Shoe Co. in 2005 for $205 million, a 2.8x return.

Following a playbook similar to that of Heritage Partners, Lineage Capital typically splits up the equity portion of its deals into three equal parts, taking two for itself. Its first third gets preferred status, with a fixed return and liquidity preference. The two remaining thirds, one Lineage Capital’s and the other belonging to the reinvesting shareholders, get common status. Its pitch to family-owned business, according to its Web site: “We will allow shareholders to receive 80% of their value today while retaining control of the board of directors and up to 50% economic ownership going forward.”

“Lord knows we get crushed in enough auctions,” Glick said. “It’s nice to know you have a different point of differentiation.”

Lineage Capital portfolio companies include Constantine Carpets, a maker of broadloom commercial carpets; Crompco Corp., which monitors and checks compliance of underground fuel tanks at gas stations; lamp maker Hubbardton Forge; and label maker Resource Label Group. The firm closed its $160 million debut fund, Lineage Capital LP, in 2004 after a one year fundraising process. The fund, whose backers include funds-of-funds manager Northgate Capital, is now 45% invested.—M.C.