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August 27, 2012

Private Equity Analyst features Klune sale as Exit of the Month

LBO EXIT: Vance Street Takes Off With 3x Return on Klune Industries Exit

Mohammed Aly Sergie
August 27, 2012

When Vance Street Capital acquired Klune Industries Inc., a maker of metal aero-structures, in 2010, the plan was to improve the company's operations and shift its bias toward commercial aerospace from its traditional focus on the defense industry.

The plan was working. The platform positioned itself toward the stronger commercial space with the September 2011 acquisition of GCM North American Aerospace LLC from Churchill Equity, and the firm was targeting additional add- ons that would push Klune into a $300 million business.

But a hot mergers and acquisition scene in aerospace gave Vance Street the option to exit Klune before it even reached $200 million in annual revenue and return more than three times the firm's investment, according to a person familiar with the transaction. The company's sale to Precision Castparts Corp. also gave Vance Street its first exit from its debut fund. Precision, which makes fasteners and other metal components for the aerospace and industrial markets, is diversifying by building an aero-structures business focused on making parts for the airframe, ribs and doors of planes.

Terms of the deal weren't disclosed.

Aerospace and defense has undergone multiple transitions over the past three decades. The U.S. government ramped up spending during the Reagan administration, dialed back after the end of the Cold War, and then flooded the sector with investment following the terrorist attacks on Sept. 11, 2011. Consolidation and M&Aactivity hit different parts of the industry in waves over the years, according to Anita Antenucci , a senior managing director at Houlihan Lokey . She said makers of components for commercial aircraft as well as new military technology such as providers of unmanned aerial vehicles, cyber security and ballistic protection have seen the most action in the past few years.

Deals stalled during the recession, according to Ms. Antenucci, who heads her firm's aerospace, defense and government group, but the interruption was short due to booming order books for commercial aircraft at Boeing Co. and Airbus SAS . That helped drive multiples to around 9.3-times earnings before interest, taxes, depreciation and amortization, slightly below the 2007 peaks of over 10-times Ebitda.

Pricing companies at multiples of 12-times forward Ebitda "isn't unusual" in commercial aerospace, signaling the "unprecedented strength" in that segment of the market, Ms. Antenucci said. With the inability of public equity markets to finance smaller companies coupled with an overflow of corporate and private dry powder, the "environment for M&A, both for strategic and private equity buyers who can use cheap, plentiful debt for deals, is encouraging," she added.

Changing Klune's focus - which makes doors, wings and other components for commercial aircraft, and missile components, bomb racks, rotors and airframes for the military market - was an integral part of Vance Street's strategy for the platform.

The company has 740 employees and operations in Spanish Fork, Utah, and Kent, Wash., with customers that include Lockheed Martin Corp., Boeing and Raytheon Co. The North Hollywood, Calif., company makes components that will be used to in the Boeing 737, 777 and 787 planes scheduled for delivery over the next three years.

"We were happy with the business that they were doing on the defense side but saw real opportunity on the commercial side," said Richard Crowell, a founding partner at the firm.

 

Klune Industries Inc.

The Firm Vance Street was formed in 2007 and is investing from a $320 million fund, which was raised from individual and institutional investors and closed in 2008. The firm targets companies with $50 million to $200 million in enterprise value operating in the aerospace, defense, health care and precision manufacturing sectors. Portfolio Companies

Process Fab Inc., an aerospace contractor; Secure Communications Systems Inc., a provider of data encryption systems for the military; and Semicoa Corp., a manufacturer of semiconductors for the military, aerospace and industrial markets. Klune was the firm's first exit from its debut vehicle.

The Buyer Precision Castparts has purchased at least two other companies from private equity firms. In May, it agreed to buy Centra Industries Inc., a maker of aluminum and hard metal aircraft components, from Heritage Partners, and in July 2011, it acquired aerospace parts supplier Primus International from Oak Hill Capital Partners for $900 million.