May 12, 2021
When private equity group Aurelius bought two sizeable non-core businesses from listed corporations – the carve-outs of GKN Wheels & Structures, a global manufacturer of heavy-duty wheels acquired from Melrose’s GKN in late 2020, and UK-wide mechanical and electrical provider SSE Contracting from SSE announced in early 2021 – the market conditions for M&A were hardly favourable.
In the turmoil of the pandemic it was difficult for senior partner Tristan Nagler and his team to conduct their customary forensic analysis of the two companies’ strengths and weaknesses by visiting sites and meeting management at head offices.
Yet Aurelius’ track record in carve-outs and turning around non-core businesses that had unrealised growth potential under the ownership of conglomerates gave the firm the confidence to swoop. Aurelius could see strong potential in both companies, with GKN Wheels boasting revenues of some £170m a year and SSE Contracting operating in a rapidly expanding sector that is estimated to be worth £2bn by 2023.
Both businesses suited Aurelius’ strategy and met the firm’s main investment criteria. First, they had become ‘unloved’, lost under the ownership of large companies with changing business priorities. Second, there were opportunities to add value – Aurelius’ team includes some 80+ operational experts who love nothing more than to introduce incremental improvements across the board such as in procurement, supply chains and the manufacturing process.
“Typically we find non-core businesses that never received a fair allocation of management time, capital resource and other functions,” Tristan Nagler told Drax Executive. “By giving these functions love, care and attention we can transform the performance of the business.” Also, he adds, it is often liberating for these businesses to be carved out from parent companies with many other and sometimes conflicting activities.
What’s in a brand name? A lot, as Aurelius has learned from rebranding some of the businesses it acquired over the last decade plus such as Armstrong Ceiling Solutions, a Europe-wide company, that it bought in late 2019 from German manufacturing giant Knauf. Although it may seem risky to rename such a strong global brand, especially when Aurelius held naming rights for a few more years, the firm decided to rebrand the company as Zentia after concluding there was little to lose. After all, it’s a manufacturing company rather than a consumer brand like Coca-Cola.
In fact, considerable benefits can accrue from a rebranding, says Nagler, as excitement builds around the exercise among customers, suppliers and employees.
“So we decided to get on with it and we came up with a brilliant new name”, explains Nagler. “There is a logic to it. Zentia has the letter A and the letter Z, and the idea was that the company provides solutions from A to Z”. Although the logic may be lost on customers, it’s certainly a memorable name that trips off the tongue.
A wave of activity
Aurelius was far from alone in biting the bullet during the pandemic. According to data compiled by law firm Mayer Brown, private equity firms sealed £10.1bn worth of carve-outs in the UK in 2020 in a busy market. The economic turmoil triggered a mass exit by big business of strategically less important entities as they concentrated on their core operations – and private equity was happy to oblige. In the UK in 2020, private equity funds completed a total 14 carve-outs, more than double the number in 2019, points out Mayer Brown.
But the acquisition is one thing, the turnaround is another. And here Aurelius comes to the new company with a patient approach rather than with ready-made solutions and a financial toolbox.
“We take a holistic view across all areas of the business and steadily build our understanding,” explains Nagler. “We don’t want to be too quick to form judgements. We identify the low-hanging fruit, the things that are most easily done, while also looking for longer-term operational improvements that can be made.
“If you allow a lot of money to be spent too soon without giving it much thought, you will end up with what the management team or the site managers would like, not necessarily what the investor would like. Overall, it’s a collaborative process.”
In practical terms Aurelius’ process is based on dozens of incremental changes that are carefully tracked for their effectiveness. “It is a bit like taking a motor and stripping it down,” Nagler puts it in a neat analogy. “We clean all the parts and make it fit for purpose. A lot of what we are doing is polishing the business, piece by piece.”
As a company’s performance is fine-tuned right across all its operations – manufacturing, sales, back office, customer relations, R&D and other areas, these insights become valuable intellectual property.
Aurelius’ meticulous, step-by-step approach has helped the firm defy the vagaries of the carve-out market. Since the firm was established in 2006, it has successfully invested in more than 100 companies that transcend geographies, industries and sectors. In spite of the pandemic-hit market, the latest endorsement of the firm’s track record came in late April 2021, when investors piled into its new mid-market, €500m private equity fund.
In the first quarter of the year alone, Aurelius closed seven new deals and it clearly has the fire power to do a lot more across Europe and in the UK.