9-800-224 REV: APRIL 14, 2004 WALTER KUEMMERLE Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France Walter Butler was watching the traffic that rolled past his office along the River Seine in Paris. It was late in the afternoon on April 29, 1999, and he had just been in touch with the investment bank, Lehman Brothers, about a new investment proposal. His private equity firm, Butler Capital Partners, had just raised their $180-million second fund, France Private Equity II, and was considering submitting a proposal on Autodistribution S. A. (AD), the leading independent auto parts supplier in France. By most accounts, it is a wonderful opportunity, “ lamented Butler as he looked out of his th office in Paris' 8 arrondissement. “Every time I look out the window, more than 10% of the cars I see have parts that come from Autodistribution. And I see a lot of cars. ” Yet, Butler had some significant concerns due to the context of the deal. At the beginning of February 1999, the privately held Autodistribution had entered into an agreement with Strafor Facom (SF), a publicly owned industrial products company, to be sold for a combination of cash and SF stock; AD shareholders were to become the largest shareholders of the new entity.
However, at the end of March, Fimalac, another publicly owned industrial products company, made a bid for the entire organization shortly before the sale had closed. Fearing that Fimalac would neglect the Autodistribution business, the AD shareholders were forcing the SF management to find an alternative solution for Autodistribution. The major requirement was that the new buyer complete a deal on the same terms (i. e. at the same price of FF 3,455 million1 ($552 million) and under the same conditions, including the same warranties) on which SF had agreed to purchase AD.
Butler highlighted his concerns: The AD business is a very attractive opportunity, but some of the constraints of the proposal put quite a strain on the investment decision. Due to the specifics of the deal, not only do we have no flexibility on price, but we also have very little time to evaluate the investment thoroughly. With a little over two weeks to complete the transaction, we not only need to complete our due diligence, but we also need to secure financing. That is no small order, as this could be the biggest buyout in Europe for 1999 if completed. To make things more interesting, it would require an equity commitment 1. times the size of our firm’s largest investment to date. This is challenging even if it is perfectly in line with our fund’s charter. 1 The French Franc exchange rate is FF6: US$1. ____________________________________________________________ ____________________________________________________ Professor Walter Kuemmerle prepared this case with Dean’s Fellow William J. Coughlin (MBA ‘99). HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2000 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www. hbsp. harvard. edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 800-224 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France
The question becomes, should we even bid on this deal given these difficult circumstances? One thing is clear: if we do bid, life will become interesting. The French Private Equity Market 1998 was a banner year for the venture capital/private equity market in Europe. According to the European Private Equity and Venture Capital Association (ECVA), not only did investment in this region rise by 50% that year to EURO 14. 5 billion ($15 billion), but it also saw a record level of funds raised of EURO 20. 3 billion ($21 billion). (See Exhibit 1 for fundraising and investment data. According to Paul Waller, outgoing chairman of the EVCA, there was still room for growth as the U. S. venture capital market was four times the size of the European market even though the gross domestic product was of similar size to the United States. (See Exhibit 2 for economic data). 2 Outside of the UK, France was considered the largest and most mature private equity market in Europe. Like many other continental European markets, France was characterized by a large number of small- and medium-sized family-owned companies.
As a result, much of the deal flow in France was generated from succession issues within these companies. In addition, there was an increasing emphasis amongst large companies in France to streamline operations and dispose of non-core assets. 3 These trends were reflected in the types of transactions seen in the market. While seed and start-up investments in Europe were accelerating, the most significant portion of the investments were in management buyouts and buy-ins, representing 46% of investment in France and over half of the amount invested in the UK. European buyout funds also posted the best returns in the 1990s, demonstrating 30% returns over the period (see Exhibit 3 for returns by fund type). 5 However, with these trends, the main concern for the future was that the big increases in funds raised would result in “too much money chasing too few deals”—a trend that was already visible in the increased competition seen in the large end of the market, according to Butler. Walter Butler and Butler Capital Partners Walter Butler was born in Rio de Janeiro, Brazil in 1956 to an American father and a half-French, half-Brazilian mother.
After spending his early childhood in Brazil, Butler moved back to France with his mother after his parents divorced. In 1983, Butler graduated in the top five in his class at the prestigious Ecole Nationale d' Administration (ENA) and went to work with the French Treasury as Inspecteur des Finances (see Exhibit 4 for the biographies of the Butler Capital Partners team). In 1986, he became head of privatizations in the media sector for the French Government. In 1988, he left the Government to become an executive director in the investment banking division at Goldman, Sachs. Butler explained his move. McCurry, Patrick, and Andy Thomson. 1999. “Investors Jump on Europe’s Private Equity Bandwagon. ” European Venture Capital Journal (July/August). p. 18. 3 Davisson, Anita. 1999. “Adopting a Pan-European Focus: The European Marketplace Comes of Age. ” UK Venture Capital Journal (May/June). p. 39. 4 McCurry, Patrick, and Andy Thomson. 1999. “Investors Jump on Europe’s Private Equity Bandwagon. ” European Venture Capital Journal (July/August). p. 19. 5 Ibid. 2 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France 800-224 It was a different world at Goldman, Sachs.
Being French was not necessarily a plus and being a former civil servant was definitely not a plus. But this was where I learned everything, not only about finance, but also about business in general. Everything in life is possible, but you need to make the right moves to be successful. One day, while working on an M&A assignment, I was putting together a book on strategic alternatives for a European company. As part of the presentation, we listed the various parties that could be interested in purchasing the client. In the end, we had a couple of strategic buyers and tons of U. S. inancial buyers of all types, but no European financial buyers. At that very moment, it struck me that this was a tremendous opportunity that I needed to pursue. Though the risk was significant, I felt that in 1989 I was able to handle it; ten years later I probably would not. With that in mind, I moved back to France to begin raising the fund. Initially the experience was a case of the extremes: it was much worse than my worst nightmares, but much more exciting than my wildest dreams. I had no team and no track record—I had a U. S. brand but initially there was just me and…me.
Six months after starting I hired an assistant, and the next person to join was Michel (Vedrines, director) but that was after the fund was raised. I still do not know how I did it. The first fund, European Strategic Fund, closed in 1991, 18 months after Butler began the fundraising process. Focusing on small family owned companies and on divisions of larger companies, the FF 300 million ($50 million) fund was very successful during a very difficult period in the French economy (1991-1996), attaining gross returns of 38-39% (see Exhibit 5 for the investments in the first fund).
On the back of this success, Butler Capital Partners closed its second fund, French Private Equity II, in September 1998 at FF 1. 1 billion ($180 million), becoming one of the largest independent funds in France. The new fund would focus on investments in France and would continue to make traditional capital investments similar to those from the first fund, but on a larger scale. Given the development of Butler Capital Partners, the roll-up envisioned in the Autodistribution transaction could be the perfect opportunity for the fund—at least under normal circumstances. In order to decide on the investment, we first need to get to get smart on the company and the industry…and in a hurry,” Butler instructed his team. Autodistribution: A Dominant Force in the European Auto Part After-market The European Automotive Part After-market The four largest markets in Europe for automotive after-market supplies were Germany ($15. 8 billion), France ($13. 3 billion), the United Kingdom ($6. 7 billion) and Italy ($6. 7 billion). 6 Every market was very fragmented, with no company holding a share of any significance.
In the UK and in France there were companies that began to exhibit some size ($500+ million in sales), but at the same time, had a relatively small share of the total market (around 10%). “It was amazing,” mused Butler. “I had never seen an industry where a company (AD) was number one in Europe, but had no real presence outside the home market. ” Nevertheless, throughout the early to mid 1990s, the European auto supply market saw steady growth. Between 1992 and 1996, the European market was led by Italy (5% CAGR), the United Kingdom (3. % CAGR) and France (3. 3% CAGR). (See Exhibit 6 for an overview of each of the major markets. ) The French market had seen most of its growth in the period 6 Based on 1996 data (source: Butler Capital Partners company documents). 3 800-224 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France from 1992 to 1994 (3. 5% CAGR) and the market continued to grow by 2% to 3% from 1994 onwards. As for future growth, at the start of 1999, the market was expected to grow by 2% to 3% for the foreseeable future.
Factors for growth included a growing number of cars in circulation, an aging car fleet, an increased technical complexity of car parts, new legislation requiring more frequent compulsory vehicle inspections, and deregulation to meet European standards (see Exhibit 7 for the impact of deregulation). The French automotive parts market was organized around three main distribution channels—the car manufacturers channel, the independent wholesalers channel (AD’s business), and the “new distribution” channel (see Exhibit 8 for a diagram of the industry channels).
Historically, legislation in France insulated car manufacturers from competition from independent wholesalers. Unlike the rest of Europe, the car manufacturers tied up car dealerships and agents with exclusivity deals that prohibited them from purchasing parts from independent wholesalers. Moreover, there were certain parts sold by car manufacturers that independent wholesalers were simply prohibited from selling. “AD can supply about 95% of the number of parts for a car,” explained Vedrines. “In the past, they could not sell body parts, but deregulation should change much of this in 2002. The main trend during the 1990s had been a boom in the “new distribution” channel comprised of new auto centers and fast-fit body shops. These new distribution businesses saw a huge increase in market share during a seven year period through 1994 as they took business from gas stations, independent garages, and agents, while car manufacturers and independent wholesalers were able to retain market share. However, the boom seemed to end in the mid 1990s as market shares had remained steady throughout the industry since 1994. (See Exhibit 9 for market share data. Autodistribution History Robert Gerbois created Autodistribution in 1962 as an automotive parts-purchasing association controlled by independently owned affiliates. Originally a loosely organized, central- buying cooperative, AD acted as an intermediary between its affiliates (wholesalers in automotive replacement parts) and their suppliers. The intent was to pool together a group of independently owned wholesalers to gain purchasing power and price discounts through the volume generated by their aggregated purchase orders.
When Gerbois died in 1976, the son of one of the major affiliates, Pierre Farsy, assumed control of the buying unit and proved to be a dynamic and influential figure in the organization. By the early 1980s, AD had begun using the profits generated by the central buying unit (CBU) to acquire wholesalers--not only affiliates, but unaffiliated companies as well. Many of these companies were financially or operationally troubled companies that AD was able to rehabilitate through its increasing financial power and industry expertise.
Over time, the purchasing power of AD grew as it continued to increase the volume of the parts purchased through the CBU. While integrating affiliates and consolidating the group in France, Farsy also turned towards Europe and began developing an international brand through a subsidiary, AD International (ADI). Started by Gerbois in 1976 in Belgium, Farsy expanded the network to seven buying units in seven different countries, with each country’s network owning an equal share in ADI.
The increased purchasing volume generated by the international buying unit enabled each international affiliate to obtain an additional 2% to 3% discount off the prices negotiated locally, with such additional discounts distributed to the local buying units based on purchasing volume. After registering the AD brand in 1984, Autodistribution began incorporating it throughout the network of wholesalers and garages in France and the rest of Europe. By the end of 1998, Autodistribution had become the largest independent wholesaler in France, with a market share of 33% in the independent wholesaler segment and 10% overall (see Exhibit 10 4
Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France 800-224 for market share information). With approximately FF 5. 4 billion ($900 million) in sales and a network that represented over FF 7. 0 billion ($1. 2 billion) in combined revenues, AD was also the largest independent wholesaler in Europe (see Exhibit 11 for AD’s historical financial information). Autodistribution was organized around three business functions: the CBU, company-owned wholesalers, and auto centers (see Exhibit 12 for an organization chart). The CBU was at the center of the AD organization.
It represented a group comprised of 58 subsidiary wholesalers and 99 affiliated wholesalers and negotiated with over 350 suppliers. The company-owned, subsidiary wholesalers accounted for approximately 50% of the purchases made by the CBU. The auto centers conducted AD’s business-to-consumer activities through Maxauto, a 75-store garage chain, and Axto, a 24-store exhaust and brake replacement shop. Since the unit was still early in the expansion phase, its FF 350 million ($58 million) in revenues placed each business well behind the industry leaders in each segment and the unit had yet to reach breakeven.
Moreover, the auto center business remained a small part of the operations, having accounted for less than 7% of AD’s sales. Why AD is for Sale (Again): Deal History Strafor Facom was a leading industrial product manufacturer of specialized tools in France. The company had very close ties with Autodistribution, having been a long-time supplier of products to AD. Almost immediately after becoming CEO of SF in June 1998, Paul-Marie Chavanne began negotiations with AD about a potential merger (see Exhibit 13 for Chavanne’s biography).
Chavanne explained his career and interest in AD. I have always been interested in cars for as long as I can remember. I left Peugeot not because I wanted out of the automotive industry, but because I came to the realization that I was too much of an entrepreneur to stay at such a large corporation. I always had the feeling that I wanted to run an entrepreneurial organization but at the start of my career, I did not know for sure. Then, after a number of years at Peugeot, I found that I was acting more as an organizer than an entrepreneur.
Moreover, Peugeot was really a player in the French market only, and I wanted to be a part of a business that had broader interests in an international context. I accepted the position at Strafor Facom because of the chance to lead an entrepreneurial organization that had a broader focus. I was interested in merging with AD, not only because of the automotive connection, but also because of the tremendous growth opportunities the company had throughout Europe. AD was not just a French company, but an entire international network that was built around the AD concept, the AD brand and the AD process.
Given the fragmentation in both the French and the European market, I believed there was a tremendous opportunity for growth given adequate access to capital and the right operating environment. The discussions with AD began in June of 1998 at the instigation of Rothschild, the French merchant bank and advisory firm (see Exhibit 14 for a history of the transaction). After a couple of meetings with AD, in which Farsy and Chavanne shared their views on the auto parts market, the two companies began discussions about a merger. Chavanne explained the nature of the discussions.
We shared very similar views on the direction of the auto parts market and the strategic direction of AD. The initial phase of growth for AD would be to purchase these independent affiliates to consolidate our position in France before tackling European expansion. SF not only had the capital to commit to this strategy, but was also publicly traded. Since many of the owners of AD were also the owners of the independent affiliates and were approaching retirement age, this was an important point. A merged entity created a vehicle where they could sell their independent businesses—the importance of which was being dwarfed by their 5 800-224
Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France interest in AD anyway—while creating liquidity for their AD holding by trading it in for SF shares. Most importantly, as the largest shareholder group post-merger with a 20% stake, they would retain effective control over the entire combined entity. At the end of February 1999, Strafor Facom entered into an agreement with Autodistribution's shareholders to purchase 100% of Autodistribution in 1999. However, soon afterward, publicly owned Fimalac, another diversified industrial products manufacturer, placed a hostile takeover bid on Strafor Facom's shares.
This bid was rejected both by Strafor Facom's management board and by Autodistribution's shareholders. Strafor Facom tried first to find an industrial company or a financial investor willing to place a counter takeover bid against Fimalac. Chavanne recounted the experience. Since we had already made a deal with AD and since AD shareholders would then be the largest shareholder of SF, we needed to get approval for any Fimalac proposal from AD shareholders, which effectively meant we needed approval from Pierre Farsy.
Even though AD was a broadly held organization, Pierre had run the organization for a number of years, was the owner of an independent himself, and more or less had the complete trust of all of the shareholders. His influence was significant. In the Fimalac proposal, Pierre knew that Fimalac would not have the resources to develop both the combined Fimalac/SF business and the AD business at the same time. In fact, the offer to include AD was more of an afterthought for Fimalac when they placed the hostile bid for SF.
As a result, we needed to either find a white knight for the entire SF organization including AD or we needed to find a separate buyer for AD that could guarantee its development and implement a build-up strategy. Our initial attempts focused on finding a white knight for the entire business, but this proved too difficult due, at least in part, to the time constraints imposed by the closing of the AD transaction. As a result, we turned our attention to finding a separate buyer for Autodistribution. That is when we became aware of Butler Capital Partners.
Rolling it up: Autodistribution’s Strategy There were four key elements to AD’s strategy going forward under Chavanne. The first element of the strategy was to pursue an aggressive acquisition program to build up the organization set in two stages. Stage one focused on opportunities within France, with the goal to acquire around FF 1 billion ($167 million) of turnover each year. Around half of these acquisitions would be AD affiliates, on many of which AD had a right of first refusal, and half independent wholesalers not affiliated with AD.
After approximately three years, most of the acquisition opportunities in France would be exhausted, so the company would focus on acquisitions outside of France. The first targets here would be European wholesalers affiliated with the ADI network. The second element of the AD strategy was to increase efficiency within the organization’s existing subsidiaries. “About one third of the subsidiaries were highly profitable,” said Chavanne, “one third were of average or adequate profitability and one third were under-performing or loss making subsidiaries. We need to take measures to ensure the last two categories increase their efficiency.
These include everything that goes from the implementation of best practices to the re-evaluation of management. ” The third element of the AD strategy was to improve the central organization through the elimination of back-office expenses and through better coordination of logistics. “At the time of the AD purchase by SF,” explained Chavanne, “there was very little centralization of the administrative aspects of the business. In addition, we needed an investment in logistics of approximately FF 50 million ($8. 3 million) to centralize the control of the inventory flows throughout the organization. The final element of the strategy was to increase the purchasing power of the CBU. Part of this would be accomplished through the increased demand garnered through the acquisitions described above. Another method would be to increase the percentage of purchases affiliates and subsidiaries made 6 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France 800-224 through the CBU. “Since we assumed our market share in the existing business would remain stable and since we expected the market to grow at two to three percent over the near term,” Chavanne explained, “ we needed to find ncremental growth in the existing business. Therefore we wanted to get the subsidiaries to increase their purchases from 65% to 70% over the subsequent three to four years. ” Another method by which the management expected to increase the CBU purchasing power was through increasing the supplier base. “Currently, most of our suppliers are in France,” Chavanne said. “By expanding throughout Europe, we also expected an enlargement of our supplier base that would allow us to arbitrage automotive part prices in other markets. Through these four strategic elements, Chavanne and AD management expected to make Autodistribution a powerful presence not only in France, but in the broader European market as well. …And Along Comes Butler Capital Partners History of Involvement In early April, Butler Capital Partners first approached Lehman Brothers about the Autodistribution opportunity. Karin Jacquemart-Pernod of Butler Capital Partners explained the initial development of the deal. Walter had contact with Lehman on April 1, 1999 when the Fimalac offer became public.
Lehman was looking for a white knight to fend off the hostile takeover attempt of SF. Our discussion at first centered on a Butler Capital Partners buyout of the entire entity, but after two to three weeks, the discussion shifted to a buyout of Autodistribution alone. Aside from getting a brief overview of the market, the company and the opportunity, we really received little information from Lehman. Then, for three or four weeks, we heard nothing at all from them but continued working on the deal by studying AD and the related businesses from an outside perspective.
Lehman’s bankers were trying to get authorization to release more information, but I suppose they were really just focusing everyone’s efforts on trying to sell the entire business. For a while there, we thought we were out of the running and then, all of a rd sudden, we were allowed access to a data room on April 23 for our first look at AD’s internal th numbers. On April 29 , we had a second shot at the data room and a second meeting with Lehman, where they provided a much more thorough presentation of the management’s plans for the business.
From that meeting, we could see that we were in the running, but we only had a little over two weeks to finalize a bid if we decided to make one. Based on the information gathered in the data room and from the meetings with Lehman Brothers, there were some concerns that developed due to the constraints of the deal that were put on potential investors. Aside from the constraint created by the short evaluation period, the absolute valuation seemed in line with the market for the industry. However, compared to the prices paid in Butler Capital Partners’ other investments, the valuation looked rather “fully priced. As a result, the team needed to make sure they could justify the valuation as reasonable for this particular transaction. Also, there was limited information available in the data room. This was not only a concern for Butler Capital Partners’ in-house investment decision, but also for the evaluation of financing by the banks. However, the information they did receive was quite useful, as the numbers had been audited only two months prior in connection with the original Autodistribution acquisition by SF. Finally, there were the potential liabilities associated with the company.
While Butler Capital Partners would receive the same representations and warranties as SF and could review all SF due diligence reports available in the data room, the team had a limited ability to investigate the company's liabilities due to the lack of time and information. 7 800-224 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France In light of the numerous constraints put on Butler Capital Partners, the one area in which they felt had some flexibility was the capital structure. Since the price of the transaction was already determined, the one source of value for the fund was in structuring the deal.
Butler commented on his fund’s approach to structuring the transaction (see Exhibit 15 for the proposed capital structure). When thinking about the deal structure, the first thing that we must be cognizant of is the nature of the business. Since AD is pursuing a build-up strategy, we want to build as much flexibility into the capital structure as possible in an effort to avoid limiting AD’s ability to pursue their strategy. That being said, we want to ensure we are able to achieve an equity return that is commensurate with the risk and our objectives in the fund.
Since we can not negotiate on price, the only way to enhance the return is through the different levels of financing—especially debt—in the capital structure. Our capital structure needed to reflect a balance between these two goals. Another consideration was the amount of capital Butler Capital Partners could, or wanted, to put in the deal. Butler Capital Partners’ covenants required that they put no more than 20% of the FF 1,100 million ($180 million) into any one deal. In order to complete the deal, the fund needed to find alternative sources of equity capital outside of the fund.
One potential source was management; this provided the additional benefit of aligning incentives. For example, the equity stake the CEO had in the company could provide a significant incentive. 7 But management could only contribute so much cash toward the offering and Butler could not afford to give away free equity—for a variety of reasons. Another source was other private equity funds. But this source was also limited, as these funds faced even sterner timing issues for diligence than Butler since they would come into the deal even later than Butler Capital Partners.
A final source of capital came from the existing AD shareholders who would exchange one third of their existing stock for stock in the new entity. When Butler developed the proposal for the capital structure, the composition of this group and their objectives needed to be taken into consideration. Pierre Farsy had significant influence over the group, but even he had limited persuasion power. Even with this flexibility, the complex developments of the deal history unveiled some additional constraints. Since we were brought into the deal at such a late point in the process,” explained Pierre Costes of Butler Capital Partners, “the availability of financing had become quite tight. When the various interests put together their proposals for the transaction between SF and AD, they made sure they secured financing for the deal. In the process of doing so, they conflicted many potential sources of debt and mezzanine financing. Thus, four out of the six major French banks were effectively eliminated from providing us with financing. One potential source of financing was from a French bank with which Butler Capital Partners had worked before—Banque Nationale de Paris (BNP). Although they had not yet guaranteed funding, BNP did give Butler Capital Partners a term sheet that outlined their indicative pricing levels and amounts (see Exhibit 16 for the preliminary term sheet). Although the team was pleased to find a bank that was not conflicted, there were still some serious issues over the terms of the financing. Butler explained his concerns. There were several elements to the original term sheet that concerned us.
First of all, the pricing levels were quite high. The spread levels were at least 25 basis points (bps) too high across the board. Second, BNP required that most of the fees to them were due even if our bid was not selected. That is something that was simply unheard of. Third, BNP required that a formal working capital facility be put in place. AD already has a working capital facility in 7 Chavanne’s last salary at SF was FF 3 million. 8 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France 800-224 place, just not a formal one.
By making the facility a formal arrangement, AD would incur a fee that was unnecessary. Finally, the term sheet required that all the equity would be paid up front, even though about 3% of the equity would not be purchased until 2001. 8 Not only would we rather delay that equity infusion, but we would also like to use the cash flow from operations to finance the transaction if AD is ahead of budget. Although none of these elements pleased us, we were in somewhat of a bind. There was very little time available to us before we needed to submit our proposal, and we could not negotiate on all of these issues.
Moreover, there did not seem to be many other alternatives outside of BNP available to us; because of the dynamics of the deal, only a couple of banks could possibly finance this. As a result, we had to prioritize our concerns carefully and decide which elements we could accept, which elements we could renegotiate at a later date, and which elements were deal breakers. To Invest or Not to Invest? Despite all of the constraints caused by the dynamics of the transaction and the deal history, Butler and his investment team believed there was an investment case for an AD buy-out and buildup.
Vedrines believed that the market throughout Europe was ripe for consolidation. “I am quite sure the auto parts market will consolidate,” he said. The driver of the industry is securing the best purchase price. Before, the buying associations similar to the original structure of AD were sufficient for that and were the only practical way of organizing the industry. Logistically, it was impossible to consolidate in an efficient manner, as the dynamics of the business did not allow for much in the way of eliminating costs. For example, take inventory control.
The dynamics of the business required that a particular wholesaler needed to have a part in his hands within as little as 1/2 an hour for many parts in order to serve the needs of repair garages in his environment. Often the mechanic wants to keep the car on the lift while getting a part he had not anticipated needing; by definition, there would be a significant amount of inventory overlap as the market drove this requirement. But with the recent changes that have come forth in information technology and logistics, there are ways to fix this problem. For instance, we can now identify highturnover parts and low-turnover parts very quickly.
The former will be stored close to final customers. The latter will be stored in central storage. And we can reassign parts to different storage locations very speedily. It is these changes in information technology that will bring about the opportunity to see margin improvements through consolidation and will bring about the opportunity for a pan-European market to develop. Butler Capital Partners also believed AD had several other attractive attributes that warranted consideration (see Exhibit 17 for a detailed account of Butler’s investment case).
As his team put together a financial model for the transaction, Walter Butler was able to better quantify the investment opportunity. “We thought we had one edge over the competitors,” Butler recollected. “That was a vision of the opportunities e-business could bring to the industry. These e-commerce opportunities could greatly increase the value at exit. ” Also, the internal growth opportunities presented by the acquisition of the independent affiliates could also help grow sales.
Not only would AD get the affiliate’s revenues but the CBU would stand to benefit as well; independent affiliates made 55% of parts purchases through the CBU compared to 65% for AD-owned subsidiaries. Externally, the purchase of other nonaffiliated wholesalers would continue, but the acquisition 8 For tax reasons, certain shareholders could not close the transaction before 2001. 9 800-224 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France opportunities in France, both internally and externally, would really run out after two to three years.
Therefore the acquisition opportunities in the fragmented European markets were very attractive. Finally, potential margin improvements were significant. For an acquisition of an affiliate representing 10% of revenues, the group’s gross margin increased by 1 percentage point and the operating margin by 0. 2 percent. The acquisition of independent wholesalers could bring even greater margin improvement (see Exhibits 18 and 19 for Butler Capital Partners’ assumptions for the AD business and for comparable company information). However, there were risks involved in the deal that were significant.
First, there was the fact that no one at AD had had any real international experience except for Chavanne even though most AD managers were internationally aware thanks to the ADI network. After the transaction there would be a new AD with European ambitions, but with limited experience in that market aside from this experience with ADI. This brought about the more important concern: execution risk. There was definitely an opportunity in AD, but that was because the firm lacked structure. It was a loosely organized, entrepreneurial business run by men and women who were entrepreneurs.
This entrepreneurial spirit had been a key to the success of the enterprise, but there was a dire need to centralize control for the LBO to be viable and to produce the 30% IRR Butler’s fund would require. The key to success was to change the culture of the company from one of an association to one of a corporation without destroying the organization in the process. Chavanne shared Butler’s concerns on the cultural challenges facing AD going forward. The biggest surprise I had when acquiring AD was how old the management was. Pierre was a dynamic personality in the organization, but he was in his 70s.
It became clear that this was really the end of the founder generation. While the founders might be considered irreplaceable, there was a definite need to reinforce each level of the organization with new blood without losing the spirit of the company. The greatness of the organization was that it was an open-minded organization; an organization of free men who felt free to put forth new ideas and to level criticism. But it was tough to run. The key would be to convince people to decide to change and to implement those changes. It would be a delicate and slow process.
Walter Butler was also concerned about the due-diligence process. A problem was that his firm was somewhat late in the game. There had been several funds that had more time to perform due diligence on the company and, more importantly, to allow AD and the fund to get comfortable with each other on a personal level. In fact, Butler was aware of one group, led by BC Partners (of the ING Barings Group), which had been in the process from the very start and had produced a much more aggressive proposal. At the same time, BC Partners’ build-up strategy was more limited than the one proposed by Butler’s team.
Butler knew that BC Partners was a serious contender. As Walter Butler walked out of his beautiful “art nouveau” office building along the River Seine, he looked up at the Eiffel Tower in the distance rising above the cafes that lined the street in front of him. With cars full of AD parts whizzing past him, he knew Autodistribution could have the potential to become a power in the French and European markets. At the same time, he thought that an investment of this scale could represent a considerable amount of risk for his new fund, even though the business was counter-cyclical.
Moreover, the history of the deal and the constraints of the proposal had only increased the potential risks involved in the transaction. Finally, while Chavanne had indicated a strong interest in the CEO position, he had not yet signed on; the question about his compensation was still an open one. With the sun setting in the distance, he knew that time was running out on his decision. 10 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France 800-224 Exhibit 1 For Fundraising and Investment Data New Funds Raised in Europe: 1997–1998 997 (Em) United Kingdom France Germany Netherlands Sweden Italy Spain Norway Belgium Finland Switzerland Ireland Austria Greece 12,245 1,078 2,573 859 984 1,072 408 77 190 230 76 29 61 56 1998 (Em) 8,959 3,811 1,875 1,162 999 936 692 442 415 365 222 164 123 70 Growth (%) 26. 8 253. 5 -27. 1 35. 3 1. 6 -12. 7 69. 5 474. 1 118. 2 58. 6 192. 2 464. 2 101. 2 25. 5 Investments in Europe: 1997–1998 1997 (Em) United Kingdom Germany France Netherlands Italy Spain Belgium Switzerland Sweden Finland Norway Ireland Austria Portugal Denmark Iceland Greece European total Source: 998 (Em) 7,105 1,948 1,777 1,059 933 363 259 215 203 189 165 64 50 50 40 22 20 14,462 Growth (%) 60. 5% 46. 9 42. 4 39. 3 54. 7 38. 7 44. 6 291. 8 -42. 3 67. 0 -2. 8 77. 1 164. 0 -21. 4 84. 1 332. 5 22. 1 49. 8 1997 (#) 1,686 1,087 1,551 425 234 244 169 47 120 193 170 66 40 79 55 54 32 6,252 1998 (#) 2,018 1,513 1,544 707 267 244 233 86 115 274 161 106 93 68 50 120 29 7,628 Growth (%) 19. 7% 39. 2 -0. 5 66. 4 14. 1 0 37. 9 82. 7 -4. 2 42. 0 -5. 3 60. 6 132. 5 -13. 9 -9. 1 122. 2 -10. 4 22. 0 4,428 1,326 1,248 760 603 262 179 55 351 113 170 36 19 63 22 5 16 9,656
McCurry, Patrick, and Andy Thomson. 1999. “Investors Jump on Europe’s Private Equity Bandwagon. ” European Venture Capital Journal (July/August). p. 21. # = number of deals; Em = Euro millions. Note: 11 800-224 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France Exhibit 2 Comparative Economic Indicators, 1997 France Germany 2,092. 4 25,506 0. 7 9. 7 511. 1 439. 3 -2. 8 Italy 1,145. 4 19,919 2. 0 12. 4 238. 2 191. 5 33. 4 U. K. 1,312. 3 22,255 1. 5 5. 5 281. 3 300. 8 10. 0 U. S. 8,110. 9 30,306 1. 6 4. 6 681. 3 877. 3 -155. 38
GDP ($ bn) GDP per head ($) a Consumer price inflation a (%) Unemployment rate Exports of goods fob ($ bn) Imports of goods fob ($ bn) Current-account balance ($ bn) 1,392. 5 23,760 0. 7 11. 8 284. 2 256. 1 39. 5 Source: Compiled from Economist Intelligence Unit and Eurostat data. aEU harmonized figures, except for U. S. , 1998. Exhibit 3 35% 30 25 European Private Equity Fund Returns in the 1990s Rate of Returnb 20 15 10 5 0 All Funds Later-Stage Buyout Funds Generalista Funds Venture Fundsc 30. 0% 23. 1% 20. 2% 25. 5% Source: Compiled from McCurry, Patrick, and Andy Thomson. 999. “Investors Jump on Europe’s Private Equity Bandwagon. ” European Venture Capital Journal (July/August). p. 20. aFixed-life and evergreen funds investing in both venture and buyout opportunities. bFor top quarter funds. cIncluding early-stage. 12 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France 800-224 Exhibit 4 Biographies of the Butler Capital Partners Team Walter Butler, 43 — Prior to founding Butler Capital Partners in 1991, Walter Butler was executive director in the Investment Banking Division of Goldman Sachs.
From 1986 to 1988, he was in charge of privatization in the media sector, within the French Government. He had previously held, from 1983 to 1986, the function of Inspecteur des Finances for the French Treasury, after graduating from ENA in 1983. Walter Butler has been the chairman of the French Venture Association (AFIC) since 1997. Pierre Costes, 30 — Pierre Costes, chartered accountant (CPA), joined Butler Capital Partners in 1998, having spent the previous seven years at Arthur Andersen where he was director in the Acquisition and Special Operations department.
He graduated from Ecole Superieure des Sciences Economiques et Commerciales (ESSEC). Karin Jacquemart-Pernod, 31 — Karin Jacquemart-Pernod joined Butler Capital Partners in 1991, having spent the previous three years at Goldman Sachs, as an analyst in the Corporate Finance Department. She graduated from Ecole des Hautes Etudes Commerciale (HEC). Laurent Parquet, 33 — Laurent Parquet joined Butler Capital Partners in 1997, having spent the previous six years at Andersen Consulting where he was director in the Media and Communication Group.
He graduated from Ecole Superieure des Sciences Economiques et Commerciales (ESSEC). Michel Vedrines, 53 — Michel Vedrines joined Butler Capital Partners in 1991, having spent the previous three years as the chief executive of a medium-sized manufacturing company. From 1983 to 1988, he worked at the Institut de Developpement Industriel, a French investment company. He spent the previous 17 years at a subsidiary of Elf Aquitaine. He graduated from "Ecole Superieure de Chimie de Marseille" (Chemical Engineering) and obtained an MBA from ISA in 1983.
Jean-Pierre Pipaud, 47 - Chief Financial Officer — Jean-Pierre Pipaud joined Butler Capital Partners in 1999, having spent the previous two years as chief operating officer of NatWest Markets (Asset Management Department) in France. From 1990 to 1996 he was financial controller of SBC Warburg in France, where he managed the internal Financial Control Service. He spent the previous 13 years at Credit Agricole. Jean-Pierre Pipaud holds a master degree in business law. Source: Butler Capital Partners. 13 800-224 -14- Exhibit 5 Investments from Fund I
Initial Inv. Date Realization Date Multiple of Cost Company Name Realized Investments I B N D Total realized Unrealized Investments F C G O Total unrealized Total Investments Strategy Type of Business Cost Proceeds Total Value IRR Build up Buy-out Buy-out Turnaround Market research Logistics/express delivery Mailroom equipment producer Global advertising Sep-97 Dec-97 Oct-92 Mar-92 Oct-94 Jul-99 Jan-99 Sep-97 Apr-97 144. 0 64. 0 25. 0 15. 2 30. 0 278. 2 488. 5 117. 2 34. 7 76. 0 716. 4 488. 5 117. 2 34. 7 76. 0 716. 4 60. 9% 28. 2 18. 7 46. 37. 6% 2. 3 4. 7 2. 3 2. 5 2. 6 Buy-out Buy ; build Buy-out Turnaround Labels for food packaging Specialist directories Office supplies products IT services Jan-92 Aug-92 Jul-93 Dec-97 32. 6 9. 3 17. 0 60. 0 118. 9 397. 1 0. 0 0. 0 0. 0 0. 0 0. 0 716. 4 5. 0 19. 9 37. 5 300. 0 362. 4 1,078. 8 -31. 3% 11. 6 13. 9 162. 8 27. 0% 32. 8% 0. 2 2. 1 2. 2 5. 0 3. 0 2. 7 Source: Note: Butler Capital Partners. Company names were intentionally eliminated. Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France 800-224
Exhibit 6 ! Overview of the Major European Markets In Germany, the car manufacturers’ channel is very strong with a reported market share of 60%. The “nothing but the best” German philosophy has led car users to often have their car serviced at the main dealer, expecting premium quality and premium products. As a result, there are fewer auto-centers or fast-fits than in other European countries. AD’s German counterpart is the firm CARAT (FF 13 bn in sales) which has recently integrated with the ADI network for its auto parts distribution activity.
The British market’s structure resembles that of France: significant position held by car manufacturers (45%) and strong development of the “New” distribution channel (around 1/3 of the market for auto-centers and fast-fits). Great Britain used to have many small traditional wholesalers, which were about half the size of their French counterparts. But many of the smaller wholesalers have disappeared and have been replaced by so-called “super factors” such as Partco (FF 4. 2 mn), Finelist (FF 3. 7 bn) or the successful buying group FSG. Spain seems to mirror French distribution trends, but is still 15 years behind.
Car manufacturers hold 38% of the market and the traditional wholesalers started forming buying groups. There are 2 main international organizations: Group Auto Union and ADI. The emerging “New” distribution channel has grown rapidly over the last few years as the needs in car servicing increased, with French-owned firms taking the lead (Norauto, Carrefour, Auchan). The Italian automotive after-market is fairly traditional but car dealers are not very strong: Italians prefer to have their car serviced in small outlets. New distribution emerges slowly but is confined to extreme North and cities. ! ! Source: Butler Capital Partners. Exhibit 7 Impact on Deregulation A positive evolution of the European legislation towards a more deregulated market should lead to stiffer competition between independent distributors and car dealers. This legislation should: ! ! ! allow car dealers, previously exclusively supplied by their car manufacturer, to buy their auto parts to independent wholesalers, allow wholesalers to sell auto parts manufactured by car manufacturers, allow wholesalers to manufacture and sell body parts that are today proprietary components, only handled by car manufacturers.
Source: Butler Capital Partners. 15 800-224 -16- Exhibit 8 Automotive Parts After-Market Industry Channels Car Manufacturers OEM Manufacturers Central buying unit “New distribution” Central purchasing unit Car dealer Automotive parts wholesaler Agents Garages and Repair shops Auto centers Hyper markets Vehicles users Source: Butler Capital Partners. 800-224 -17- Exhibit 9 Automotive After-Market Structural Overview Channel evolution has stabilized after radical pruning amongst independents and others. ESTIMATES 100% Others (1) 22 Market Share by Channel in France 100% 12 100% 14 CRA, Fast fitting and Auto centers 2 40 37 Agents ; independents 32 21 21 Dealers 24 27 28 1987 1994 1998 Source: Note (1): Butler Capital Partners. Service/Fuel stations, Wholesales, Scrappers. 800-224 -18- Exhibit 10 French Automotive Part After-Market Information Aggregate Revenues of the Main Central Buying Units or Co-operative Affiliates FFr 7 bn FFr 4 bn FFr 3,2 bn FFr 2 bn FFr 2 bn FFr 2 bn FFr 1 bn FFr 820 mn FFr420 mn CENTAURE 33 wholesalers, 245 outlets, 55 suppliers. Specialized in painting and body parts. Distributes some parts under its own label. FFr 350 mn CAGF 38 outlets, 140 suppliers, Cooperative Structure.
FFr 307 mn AGRA 34 affiliates Specialty: own label products (Auto+), Distribution brands (AMP+, S8+…). Computer link with affiliates. Located in the south of France. AD 157 affiliates, 417 outlets, 2 chains of auto-centers and fast-fits. Carexel CARDA merged with COPAFA in 1998. 3G 114 affiliates, 180 outlets, Member of Auto Union group. Expertise: consulting services. COPAFA 350 suppliers, 83 affiliates, 120 outlets. PARTNERS Formed in 1992, 11 shareholders, 170 affiliates, 180 outlets. CARDA Comprised of 180 fournisseurs. Purchase = FFr 600 mn. 150 affiliates. Expertise: affiliates on the Board. GEFA 90 wholesalers. 70 outlets. 100 suppliers. Moteur Service Expertise: computerized relations with suppliers. 800 people. 60 outlets in France and 12 in Belgium. 12 Specialized in motor maintenance. Source: Butler Capital Partners Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France 800-224 Exhibit 11 AD Historical Financial Information Autodistribution - Historical consolidated P/L Thousand of FFr Turnover (n-1 perimeter) % / n-1 without acquired n-1 turnover % / n-1 including acquired n-1 turnover Turnover of purchased companies 1994 n. d. n. s. n. s. n. d. 1995 4,323,000 n. s. n. s. 200,243 7. 0% (70. %) 29. 5% (8. 2%) 21. 3% (15. 0%) (0. 2%) (1. 1%) 0. 4% 5. 5% (1. 1%) (1. 9%) 2. 0% 4. 6% 0. 0% 0. 8% (1. 2%) (0. 4%) 4. 2% 0. 5% (0. 8%) (0. 3%) (1. 3%) 2. 5% (0. 1%) 2. 5% 0. 0% 2. 4% (2,617) (3,166,984) (0. 1%) (70. 0%) 29. 9% (8. 1%) 21. 8% (14. 6%) (0. 2%) (1. 2%) 0. 0% 0. 5% 6. 2% (1. 0%) (1. 9%) 2. 0% 5. 3% 0. 0% 0. 8% (1. 0%) 0. 0% (0. 2%) 5. 2% 0. 6% (0. 6%) (0. 5%) (0. 5%) (1. 9%) 2. 7% (0. 1%) 2. 6% 0. 0% 2. 6% 95. 6% 1996 4,498,000 (0. 6%) 4. 0% 129,372 2. 3% 188 (3,208,175) 0. 0% (69. 3%) 30. 7% (8. 3%) 22. 4% (15. 4%) (0. 2%) (1. 2%) 0. 0% (0. 2%) 5. 4% (1. 1%) (1. 9%) 2. 6% 5. 0% (0. 0%) 0. 5% 0. 2% (0. %) 0. 1% 0. 1% 5. 1% 0. 9% (0. 8%) (0. 5%) (0. 4%) (2. 0%) 2. 7% (0. 1%) 2. 6% (0. 0%) 2. 6% 97. 2% 1997 4,805,000 3. 8% 6. 8% 211,576 8. 4% 424 (3,463,077) 0. 0% (69. 0%) 31. 0% (8. 4%) 22. 6% (15. 7%) (0. 2%) (1. 3%) 0. 0% 0. 4% 5. 8% (1. 2%) (2. 0%) 2. 3% 4. 9% (0. 0%) 0. 5% 0. 1% (0. 4%) 0. 1% 0. 3% 5. 2% 0. 3% (0. 4%) (0. 0%) (0. 1%) (2. 3%) 2. 8% (0. 3%) 2. 5% (0. 0%) 2. 5% 95. 8% 1998 5,263,000 4. 9% 9. 5% 137,532 7. 7% (3,699,596) (68. 5%) 31. 5% (8. 2%) 23. 3% (15. 4%) (0. 2%) (1. 3%) 0. 5% 6. 8% (1. 2%) (1. 9%) 2. 0% 5. 8% 0. 0% 0. 4% 0. 2% (0. 3%) 0. 0% 0. 3% 6. 1% 0. 5% (0. 4%) 0. 0% 0. 2% (0. 5%) (2. 7%) 3. % (0. 3%) 2. 8% 0. 0% 2. 8% 97. 5% 4. 4% 2. 8% 4. 2% 2. 5% Total net turnover % / n-1 Raw material and goods purchases 4,228,968 100. 0% n. s. (2,981,168) 4,523,243 100. 0% 4,627,372 100. 0% 5,016,576 100. 0% 5,400,532 100. 0% Gross margin % / n-1 Other variable costs 1,247,800 n. s. (346,775) 1,353,642 8. 5% (368,000) 1,419,385 4. 9% (381,872) 1,553,923 9. 5% (421,463) 1,700,936 9. 5% (441,165) Value added % / n-1 Personnel and social charges Employee profit sharing Taxes State fundings Other products and expenses 901,025 n. s. (633,009) (6,436) (47,318) 17,301 985,642 9. 4% (662,100) (8,739) (55,709) 941 20,772 ,037,513 5. 3% (713,079) (7,830) (56,402) 1,912 (11,262) 1,132,460 9. 2% (787,251) (8,638) (64,326) 1,675 17,730 1,259,771 11. 2% (833,358) (11,627) (69,687) 24,710 EBITDA % / n-1 Depreciation allowance Risk allowance Reprises ; transferts de ch. 231,563 n. s. (44,404) (80,055) 86,277 280,807 21. 3% (46,130) (85,625) 92,281 250,852 (10. 7%) (51,196) (87,384) 120,170 291,651 16. 3% (58,784) (101,153) 114,795 369,809 26. 8% (64,889) (100,286) 105,939 EBIT % / n-1 Operations in common Cash discount on purchases Other financial income Financial charges Financial depreciation Financial result 193,381 n. s. 317 n. . 33,052 (50,763) (17,394) 241,332 24. 8% 342 n. d. 38,405 (46,814) 1,167 (6,900) 232,442 (3. 7%) (19) 22,000 8,682 (30,823) 5,623 5,463 246,509 6. 1% (74) 23,810 6,502 (20,167) 4,055 14,126 310,573 26. 0% 226 22,500 8,324 (13,958) 579 17,671 EBIT after interest % / n-1 Extraordinary profits Extraordinary expenses Extraordinary allowance Extraordinary result Tax penalty Income tax 175,987 n. s. 21,027 (34,894) (13,867) (54,829) 234,432 33. 2% 27,575 (27,442) (24,495) (24,362) (85,916) 237,905 1. 5% 41,366 (35,053) (25,186) (18,873) (92,735) 260,635 9. 6% 15,725 (21,949) (620) (6,844) (115,592) 328,244 25. % 27,814 (19,904) 520 8,430 (25,000) (145,033) Net result before goodwill amort. % / n-1 Goodwill amortization 107,291 n. s. (3,334) 124,154 15. 7% (4,761) 126,297 1. 7% (5,810) 138,199 9. 4% (15,121) 166,641 20. 6% (13,624) Consolidated net result % / n-1 Minority interests 103,957 n. s. 1,122 119,393 14. 8% 1,116 120,487 0. 9% (946) 123,078 2. 2% (528) 153,017 24. 3% 4 Group consolidated net result % / n-1 102,835 n. s. 118,277 15. 0% 121,433 2. 7% 123,606 1. 8% 153,013 23. 8% n. s. = not meaningful n. d. = not available 19 800-224 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France
Exhibit 11 (continued) Autodistribution - Historical Balance Sheets Thousand of FFr Non called-up capital Net intangible assets Goodwill Net tangible assets Investments and financial assets 1994 26,084 118,417 271,411 32,929 1995 120 31,498 103,880 286,241 50,835 1996 60 33,533 84,577 293,411 48,098 1997 44,213 80,959 349,538 28,437 1998 1,159 45,521 79,530 359,510 29,571 Long term assets Net inventories Accounts receivables Other current assets 448,841 603,545 1,104,809 466 472,454 682,354 1,136,858 112,050 459,619 688,747 1,115,275 40,138 503,147 718,979 1,253,580 44,863 514,132 736,071 1,303,184 30,273
Current assets Cash and time deposits Prepaid expenses 1,708,820 229,769 37,951 1,931,262 141,951 34,536 1,844,160 220,537 33,417 2,017,422 206,595 36,081 2,069,528 219,903 37,680 Total Assets Common stock Consolidated retained earnings Profit and loss account 2,425,381 50,778 503,086 101,964 2,580,323 24,508 632,869 118,277 2,557,793 73,523 695,683 121,433 2,763,245 308,095 516,998 123,606 2,842,402 308,095 596,319 153,011 Equity Other equity Provision for liabilities and charges Other long term debt Short term borrowings Accounts payable Other debts 655,828 18,743 36,237 490,525 n. d. 1,159,893 61,427 75,654 11,435 53,943 360,665 n. d. 1,148,741 226,801 890,639 18,380 51,024 217,200 159,359 1,000,267 217,898 948,699 15,339 46,629 271,686 107,420 1,134,485 235,018 1,057,425 14,082 45,227 59,417 165,255 1,197,772 300,171 Total debt Prepaid charges 1,711,845 2,728 1,736,207 3,084 1,594,724 3,026 1,748,609 3,969 1,722,615 3,053 Total liabilities 2,425,381 2,580,323 2,557,793 2,763,245 2,842,402 n. s. = not meaningful n. d. = not available 20 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France 800-224 Exhibit 11 (continued) Autodistribution - Historical Balance Sheets
Thousand of FFr Off balance sheet engagements Pensions Leasing for tangible assets Leasing - other tangible assets Total - Leasing n. d. n. d. n. d. n. d. 24,406 46,907 20,856 67,763 25,930 39,653 17,250 56,903 33,221 34,218 14,991 49,209 33,566 32,858 12,797 45,655 1994 1995 1996 1997 1998 Net debt Financial debts Leasing (1) Cash and time deposit 490,525 n. d. (229,769) 360,665 38,053 (141,951) 376,559 31,902 (220,537) 379,106 27,603 (206,595) 224,672 25,387 (219,903) Net debt Increase in net debt % of increase in net debt Increase in net debt (leasing excluded) 260,756 256,767 n. s. n. s. n. . 187,924 (68,843) -26. 8% (62,692) 200,114 12,190 6. 5% 16,489 30,156 (169,958) -84. 9% (167,742) Debt / equity / cap. propres Net result / equity/ cap. propres Working capital requirements Inventories Accounts receivable (net) Other current assets Accounts payable Other liabilities 40% 15. 7% 701,509 1,174,589 38,888 (1,159,893) (64,155) 33% 15. 2% 773,003 1,210,892 146,723 (1,148,741) (229,885) 21% 13. 6% 771,284 1,170,053 74,437 (1,000,267) (220,924) 21% 13. 0% 801,347 1,312,290 82,520 (1,134,485) (238,987) 3% 14. 5% 817,616 1,364,460 68,847 (1,197,772) (303,224) Working capital requirements
Change in WCR Inventories Accounts receivables Othe assets Accounts payables Other liabilities 690,938 61 days 101 days 3 days (100 days) (6 days) 751,992 61,054 62 days 98 days 12 days (93 days) (19 days) 794,583 42,591 61 days 92 days 6 days (79 days) (17 days) 822,685 28,102 58 days 95 days 6 days (83 days) (17 days) 749,927 (72,758) 55 days 92 days 5 days (81 days) (20 days) Working capital requirements 60 days 61 days 63 days 60 days 51 days n. s. = not meaningful n. d. = not available 21 800-224 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France Exhibit 11 (continued)
Auto distribution—Historical Cash Flow Statements Thousand of FFr Consolidated net results Depreciation allowance Risk allowance Goodwill depreciation 1994 103,957 44,404 (6,223) 3,334 1995 119,393 46,130 16,672 4,761 1996 120,487 51,196 (13,223) 5,810 1997 123,078 58,784 (17,077) 15,121 1998 153,017 64,889 (6,752) 13,624 Funds provided by operations Tangible acquisitions Intangible acquisitions Investments and financial assets 145,473 n. d. n. d. n. d. 186,957 45,734 10,027 36,622 164,270 61,953 10,178 38,505 179,906 93,756 13,871 27,337 224,778 61,032 6,486 36,419 Additions to long term assets (1)
Long term asset disposals n. d. n. d. n. d. n. d. n. d. n. d. n. d. n. d. 92,383 (21,298) 110,636 (33,052) 134,964 (8,796) 103,937 (12,559) Net capital expenditure (1) Change in WCR Attributed dividends Cash used - total Net cash Changes in perimeter ; ajustments 71,085 61,054 3,536 135,675 51,282 (9,240) 77,584 42,591 6,383 126,558 37,712 24,980 126,168 28,102 33,447 187,717 (7,811) (8,678) 91,378 (72,758) 43,144 61,764 163,014 4,728 Total Increase in net debt (2) 42,042 (42,042) 62,692 (62,692) (16,489) 16,489 167,742 (167,742) Notes : - (1) excluding additions financed through leasing (2) excluding leasing n. s. = not meaningful n. d. = not available Source: Butler Capital Partners. 22 800-224 -23- Exhibit 12 Organization Chart Autodistribution 1998 consolidated revenues: FF 5 401 mn Central Buying Unit Wholesalers 58 Group Subsidiaries Replacement auto parts Tools for car maintenance Industrial supplies Maintenance services •1,200 AD garages •200 independent AD body shops •19 AD service shops Revenues: FF 3,567 mm of which: 40% garages and body shops 40% trucks, corporate accounts, services 20% industrial supplies Auto-Centers 16 Group Sudsidiaries
Activity Products Replacement auto parts Tools for car maintenance Industrial supplies 350 suppliers affiliated 157 wholesalers of which: •58 subsidiaries and 99 affiliated •417 AD outlets Revenues: FFr 2,941 mn of which: •FFr 1,471 MF: group’s subsidiaries •FFr 1,470 MF: independent affiliates Car servicing Auto-parts and accessories Clients Car end-user (individuals) Revenues Revenues: FF 352 mn of which: 80% auto-centers Maxauto 20% fast fits Axto Wholesale about FF 3. 7 bn Service B-to-B about FF 1. 4 bn
Retail FF 0. 35 bn Source: Butler Capital Partners. 800-224 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France Exhibit 13 Chavanne's Biography Paul-Marie Chavanne (48) was chairman and CEO of Strafor Facom (a publicly listed company manufacturing industrial tools, with a turnover of FF 8. 8 bn in 1998). He joined Strafor Facom as COO in 1997 and became CEO in 1998. From 1992 to 1997, he was a manager and member of the Board of the French car manufacturer Peugeot-Citroen (PSA).
He had previously held, from 1978 to 1989, various functions of Inspecteur des Finances for the French Treasury and the French Finance Ministry, after graduating from ENA in 1978 (where he graduated as one of the top five students) and from Ecole Centrale as an engineer in 1976. Source: Butler Capital Partners. Exhibit 14 Date Autodistribution Transaction History Event Agreements signed between SF (Strafor Facom) and shareholders of AD (Autodistribution) Fimalac announced their intention to launch a tender offer on SF Terms of the Fimalac tender offer accepted by market authorities Butler Capital Partners’ 1 meeting with Lehman Brothers.
Lehman Brothers looking for “white knight” for Fimalac’s hostile takeover bid on Strafor Facom (SF) SF Board rejected the Fimalac tender offer Butler Capital Partners’ 1 access to the data room Butler Capital Partners had meeting with Lehman for presentation of AD nd management’s business plan. 2 access to the data room st st February 3, 1999 March 24, 1999 April 1, 1999 April 1, 1999 April 8, 1999 April 23, 1999 April 28, 1999 Source: Butler Capital Partners. Exhibit 15 Butler Capital Partners' Proposed Capital Structure (in FF millions)
Senior debt Subordinated debt Equity Butler Investment Group Existing AD shareholders New shareholders (AD’s affiliates) Management 792 559 39 15 1,450 600 1,405 3,455 Source: Butler Capital Partners. 24 Butler Capital Partners and Autodistribution: Putting Private Equity to Work in France 800-224 Exhibit 16 BNP Preliminary Term Sheet Proposal Size Coupona Term Warrantsc Senior debt: Tranche A Tranche B Subordinated loan 1,100 350 600 E+ 2. 0% E+ 2. 5% E+ 5. 5%b 7 years 8 years 10 years . 0% 0. 0% 9. 5% Source: Compiled from Butler Capital Partners; Bloomberg. aRepresents a margin over EURIBOR (E). EURIBOR was at approximately 2. 6% at the time of the proposal. In addition, the rate the 30-year French government bond was 4. 88%. b200 bps of the coupon represented capitalized interest. The balance was to be paid in cash. cWarrants levels expressed as a percentage of fully-diluted equity. Exhibit 17 Butler Capital Partners Investment Case Development opportunities !
Increase in the penetration rate of AD’s central buying unit among the affiliates by setting up an efficient IT system for purchasing. ! External growth opportunities in France: integration of affiliates or acquisition of independent wholesalers. ! Many expansion opportunities in Europe provided by the fragmentation of the industry. ! Low competition on acquisitions because of the lack of players able to afford a dynamic build-up strategy ! Strong growth potential of the industrial supplies segment. Potential of development of fleet maintenance and agreements with insurance companies. Profitability improvements ! Natural increase in gross margin as a result of the integration of affiliated wholesalers: for an acquisition representing 10% of revenues, the group’s gross margin increases by 1 point and the operating margin by 0. 2 points. ! The acquisition of independent wholesalers brings an additional gross margin of 8. 8%, increases the CBU's purchasing power and therefore puts more pressure on parts manufacturers’ prices. Potential of reduction of operating costs trough a centralization of IT systems for purchasing and sales tariffs databases, a progressive centralization of administrative tasks and a rationalization of the legal structure. e-business ! Many e-business opp