Bain Capital Reaches Into The Toolbox

By Will Ashworth | October 09, 2012 AAA

Almost one month ago to the day I wrote an article about Carlyle Group (NYSE:CG), one of the country's largest private equity firms. I recommended three companies for it to buy; one of them was Apex Tool Group (a 50/50 joint venture between Danaher (NYSE:DHR) and Cooper Industries (NYSE:CBE)). My estimation was that Carlyle would have to pay around $1.2 billion to make the deal happen. Well, Bain Capital stepped up offering $1.6 billion and that was accepted by the both partners. What does this mean for the parties involved? I'll have a look.

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Carlyle Group
My original estimate of one times revenue was almost spot-on while the $1.2 billion sale price projection was off because I used the revenue number on Apex's website in September, which is now updated to $1.5 billion. Apparently, Platinum Equity LLC, run by Los Angeles private equity specialist Tom Gores, was one of the losing bidders along with New York-based American Securities. Carlyle has more than $15 billion in dry powder left to invest from two of its investment funds. This would have been a nice acquisition.

Bain Capital
The former home of Mitt Romney strikes again. Apex Tool Group makes tools under the Craftsman brand for Sears Holdings (Nasdaq:SHLD), along with its own brands such as Lufkin, Delta, Cleco and Allen. It has $225 million EBITDA meaning Bain is paying slightly more than seven times those earnings, which is less than the current valuation for Stanley Black & Decker (NYSE:SWK). Bain is getting a good company at a fair price.

SEE: Equity Valuation In Good Times And Bad

Danaher
As long as I can remember Danaher's been one of the companies making Craftsman tools. Once it put its Danaher Tool Group assets into a joint venture with Cooper Tools, it was only a matter of time before the Apex Tool Group left the flock. In the second quarter, Danaher's 50% interest in Apex delivered just 2.2% of its overall operating profit. While the tool group represents some of its heritage, Danaher's gone well beyond hand and power tools. It was time to go and it got a good price, netting the company approximately $650 million in after-tax net proceeds.

Cooper Industries
Cooper agreed to its $11.8 billion purchase by Eaton Corp. (NYSE:ETN) in May. The merged company will generate 59% of its revenue manufacturing electrical equipment and will be able to compete with bigger rivals like Emerson Electric (NYSE:EMR). Once it struck that deal, its joint venture interest in Apex Tool Group became an unwanted part of its business.

Private Equity Industry
The Apex deal announcement is welcome news in private equity circles as there is a lot of money that has yet to be invested. At the end of 2011, buyout firms globally had $370 billion in dry powder or about 40% of its committed capital. Most of this money was raised in private equity's go-go years in 2007-2008; buyout firms need to invest that capital by the end of 2013 or face the possibility of losing those commitments. As a result, a lot of money is out there looking to be spent and potential targets know this. At the same time, buyout funds have a significant number of unrealized investments that aren't ready for sale due to slower appreciation in buyout values since 2008. That's putting enormous pressure on private equity firms everywhere. Any deals are good deals at this point. Bain's acquisition of Apex Tool Group for a reasonable must be considered a win for the industry.

The Bottom Line
This is a win/win situation for all the parties involved. Danaher and Cooper unload an extraneous part of their respective businesses and Bain Capital gets a business that it can grow over the next three to five years, taking it public as a stand-alone company. It should easily be able to double its money and then some over this period. Watch for the IPO as early as 2015. It's a natural.

At the time of writing, Will Ashworth did not own shares in any company mentioned in this article.

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