Buying in to Manufacturing

A private equity firm finds U.S. manufacturing attractive, but with conditions.

It's an old tenet of stock pickers to buy low and sell high, and U.S. manufacturing was clearly at a low point in 2000-2001 after the recession, outsourcing to China and the 9/11 terror attacks. When David Lobel, founder and managing partner of Sentinel Capital Partners, looked at the economy then, he saw that consumers were continuing to spend money, so consumer businesses were doing well, but many manufacturing firms were reeling, their valuations had sunk and so they represented, in his words, "good value."

Since that time, Sentinel has invested in a series of manufacturing businesses that fit a profile of medium-size companies with established brands and good management teams. Last August, for example, Sentinel purchased Engineered Controls International, a company that makes vessels and components for the transport and storage of propane gas and cryogenic gases. Hammered by the recession, Sentinel saw ECI as poised for recovery. Lobel noted that this is equipment for hazardous substances and that it must be replaced at recommended times or owners run the risk of potentially catastrophic failures. Moreover, Lobel says the Chinese market is growing rapidly and ECI is a proven supplier that can both sell its products there and manufacture locally as well.

Sentinel also purchased Chase Doors, a leading manufacturer of traveling doors, the swinging doors typically seen at restaurant kitchens and in supermarkets and warehouses. These doors take a beating, both from continually being opened and closed, and from equipment such as carts or forklifts hitting them. During the recession, businesses put off replacing these doors but now the company is finding pent-up demand for repairs and replacement. Lobel says there is a "very predictable replacement cycle for these doors," so the replacement part of the business can be readily forecast. And he says that as the recovery progresses and construction recovers, new installations will pick up as well. Lobel also is on the acquisition hunt for smaller specialty door manufacturers that could add to Chase Doors' product offering.

Lobel said the company favors deals for manufacturers with strong brand identities rather than, for example, component manufacturers. He explains that a company that is building components for a major manufacturer -- of construction equipment, for example -- is "basically an outsourced service provider" to that company. The component manufacturer, says Lobel, only has value as long as the construction equipment manufacturer is happy with its execution. And since the components may be readily available from other firms, it is subject to pricing pressure.

Lobel said his company generally will not purchase a company if its management team is "exceedingly weak." Sentinel views them as partners, Lobel says, not employees. "We recognize that we are incapable ourselves of managing the business," he says. "The key to success is having a very good partnership."

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