Mid-Market Exit Three-Peat

Last week, three mid-market firms scored big exits and, get this–they were not by IPO.

On Monday, Thoma Bravo scored a 4x return on its sale of Datatel to Hellman & Friedman and JMI Equity. Five days later, Sun Capital made 5.25x its money selling Timothy’s Coffees to Green Mountain Roasters Inc., while Castle Harlan and its Australian affiliate CHAMP Private Equity posted a 4.5x return on its sale of United Malt Holdings to GrainCorp.

I’m not going to get ahead of myself and declare that trade sale exits are back. As it stands, IPOs are still leading the way for buyout firms to gain liquidity and de-lever their companies. In each of the cases I mentioned above, the companies performed well and actually posted growth in a recession, something that can’t be said for many other portfolio companies.

It’s promising news for stalled auctions though, considering one of the companies (United Malt) was once “damaged goods,” having been around the auction block once before. Perhaps these successful sales will inspire other exit-ready companies to test the waters. So how did they do it?

With Thoma Bravo’s Datatel, the firm had had one of those coveted “mission critical” companies on its hands, selling tech services to colleges. Thoma Bravo contributed to the company’s already strong growth by improving its professional services support and focusing on margins. The fact that Hellman & Friedman approached the firm is a good sign that buyout firms are not passively waiting for deal opportunities to come to them, they’re beating the pavement, revisiting target ideas, and seeking out proprietary deal flow. After owning the company for years, the company sold for $570 million, or 4x Thoma Bravo’s its initial investment. (Read more on that deal here)

With Sun Capital’s sale of Timothy’s Coffees, the firm improved the company, which was losing money, by introducing new product lines and increasing its production capacity of a Green Mountain product. Sun Capital had purchased the Canadian specialty coffee supplier from its founders for $19.9 million in equity. The sale, worth $157 million, represents a 5.25x cash-on-cash return and 186% IRR for Sun Capital Partners V.  (Read more on that deal here.)

On the Castle Harlan’s end, the firm led United Malt Holdings to brand its malt products, rather than treat the raw materials like a commodity. So the company could raise its prices for special-order, higher quality products. Meanwhile it focused on the microbrew segment, a growing area within beer brewing. That increased the company’s Ebitda from $27 million to a projected $114 million between 2006 and 2009. The company sold to GrainCorp for $655 million, a 4.5x return and IIR of 80%.

As an aside, this Businessweek profile of the deal used the requisite throwaway quotes about “adding value,” and whatnot, but the paragraph that followed the “value add” quote almost made me chuckle.

Castle Harlan won’t reveal the total purchase price it paid for United Malt Holdings in 2006. But the firm says the $655 million sale to GrainCorp will allow a return that is 4.5 times the $90.5 million in equity invested.

Maybe it’s just me, but whenever a firm will tell you its equity check, return and IRR but not the total purchase price, I tend to suspect they’re not proud of the amount of debt they used to juice their return. Which, on the surface, goes directly against that whole “adding value” thing. Now, this situation explicitly spells out that Castle Harlan repositioned the company and expanded its plants, and the company’s Ebitda really did grow, so it’s clear that “value” was “added.” So to them I say, so what if you used debt to boost your return, if you left the company in better shape than you found it? All three of these deals did that, it appears, so why not just own the fact that debt was involved? Maybe I’m being naive, but no one’s going to point the “Strip and Flip!” finger if you really did what you’re press releases are telling us you did. Congrats to all three firms and their investors on their strong exits, with or without debt.

Correction: This article has been changed to reflect that both Castle Harlan and CHAMP earned a 4.5x return on the United Malt deal. A previous version only attributed the return to CHAMP.

Previously: Kind of A Big Deal: Thoma Bravo Earns 4x On Datatel Sale

Sun Capital Sells Timothy’s to Green Mountain

Champ PE Sells United Malt for $655 Million