Work Out and Investment Banking Assignment

Our client, who was in the business of web printing to a select group of national customers, was losing money at the annual rate of $2.5 million on sales of $20+ million. To further aggravate the situation, they were in the process of losing their top two accounts just as we were engaged to assist them.   Our immediate focus was to deal with their cash hemorrhage. We put in place weekly cash flows reports with rolling 13-week forecasts. Through a series of cost reductions and selected price increases, we were to bring the business to cash flow breakeven within 60 days. The cost reductions did not affect their level of customer service while the price increases, based upon a more careful analysis of their job costing system, did not cost them any meaningful business.  At the same time, the company found itself with sales of $18 million (reduced by the loss of the two large customers referenced above, who were in the process of leaving before any changes were implemented) and $16 million of debt with a gross margin of 10%. They were simply unable to service their debt, although the core business was viable, and they did generate reasonable cash flow.  A decision was made to take the company into bankruptcy in order to sell it through a Section 363 sale, presumably with a lesser debt burden. The bankruptcy court retained Stonegate to continue to consult with the company to monitor ongoing cash flows and to provide assurance to the creditors that there was no dissipation of assets or value. When the creditors could not agree on the terms of DIP financing, Stonegate was able to convince the court that the company could operate under the concept of  "adequate protection” where it was using normal cash flows (receivable collections) to keep the doors open but was in no way dissipating or reducing any assets (in this case, receivables). Stonegate was charged with monitoring the cash flows and reporting to the creditors on a weekly basis. The creditors became comfortable that the situation was under control. This assurance was critical because if the business was liquidated, the return to the creditors would have been significantly reduced.  Stonegate was also retained by the court as an investment banker to sell the company as a going concern. We contacted over 40 strategic buyers, making the case for the inherent value of the business to each prospect buyer, and ultimately negotiated purchase agreements with two buyers. We were able to play the two buyers off against each other and ultimately closed a sale for approximately $6.5 million. The end result was that the senior management of the company (not the prior owners) bought the business, retained all of the customers, and employed 90% of the existing employees. The senior lender, who had referred Stonegate as a consultant to the company, was paid in full.

  Stonegate was retained to provide interim management to a $25 million consumer products company. The company had lost over SI8 MM in the 2 years prior to Stonegate s arrival. 

The company had, in the year prior to Stonegate, terminated the family member who had been CEO and had determined that the workout firm currently running the company was not doing a satisfactory job. Stonegate was asked to provide, on an interim basis, a President and Chief Executive Officer, a Chief Operating Officer, and a Chief Financial Officer. The Company was in both financial and operational disarray when Stonegate was retained. The company's lender had declared a default and was in the process of foreclosing on the company's assets. Financial losses were staggering, cash flows were sharply negative, sales had stagnated, new product introductions had disappeared, few new customers had been secured, employee morale was low, and management talent was inadequate.

In the first 6 months, Stonegate accomplished the following:

   • Instituted $2 million of annual costs savings

   • Refinanced the company's loans with higher loan limits and more flexible terms

   • Initiated consumer research which led to new product development

   • Recruited several new senior and middle level managers

   • Generated approximately S3 million in cash flow by disposing excess assets including an old       established a lean initiative for the company's domestic manufacturing activities which ultimately generated  significant productivity improvements

Subsequently, over the first 15 months, Stonegate also achieved the following:

   • Reduced operating losses by over 80%

   • Introduced several innovative products which were well received by the marketplace

   • Created a new branding, product packaging, and fresh marketing of the Trade Name

   • Restructured Company's sourcing operations in China

   • Opened several significant new customers

   • Created meaningful sales growth through new product introductions as well as new customer relationships

   • Continued to achieve meaningful cost reductions across virtually all facets of the company's activities

Through Stonegate's efforts, the company was brought to the point of commercial and financial viability in less than 18 months, starting at a point of being within 60 days of liquidation.

Stonegate was retained by an individual to help negotiate and finance the acquisition of a company that sold movable shelving to retailers. The sales and EBITDA of the company were approximately $12MM and $3MM, respectively. The company's assets consisted dominantly of receivables, making the financing for the acquisition largely based on cash flow lending as well as a combination of equity and mezzanine financing.    

The acquisition was further complicated because of a dispute between the two family member shareholders of the selling company. This dispute made it difficult to communicate with the company and to finalize a deal.  Many of Stonegate's projects require dealing with conflicts and the emotions of various constituencies. This project is a clear example of such challenges. The Company being acquired was an excellent performer. The conflict on more than one instance almost caused the transaction to fall apart. Stonegate had meaningful involvement in helping the parties mediate the conflict.  Stonegate created a financing structure with 40% equity and mezzanine capital with the remaining 60% in senior bank financing.  Stonegate's methodology in structuring a financing is what was pursued in this case; the approach is to have preliminary discussions with various sources to verify possible structures favorable to its client and to then solicit interest from 'various financing sources. Stonegate executed that game plan very well in this instance. Stonegate and its client presented and met with various financing sources to determine the best fit for the transaction. Stonegate negotiated and achieved for its client a 33% equity stake while the client only made a $500,000 equity investment.. The company has subsequently been very successful. It has achieved sales of well above $20 million and an EBITDA of over $6 million.

  Stonegate was retained by an international multi-billion-dollar steel company to sell a stainless steel tube division in the United States.  Sales of the division, when Stonegate was retained, were $15 million with no EBITDA. Sales in the following year were projected to be $35 million with a projected EBITDA of $2 million. The additional sales and EBITDA were the result of adding a single significant customer. The division, while clearly improving from no EBITDA, had never achieved a "run rate' of $2 million EBITDA.  Stonegate contacted an initial group of approximately eight potential strategic acquirers. It did not contact the most logical buyer, who was the business's major direct competitor and who also had the largest market share. The reason for not dealing with this competitor was concern over exposing our client's confidential information to a key competitor.  Stonegate provided a Confidential Memorandum to the various interested parties. After initial discussions to determine their level of interest, Stonegate and a member of the selling Company visited the most interested buyers. A presentation, coupled with a question and answer session, occurred at each meeting.  The major competitor made contact with Stonegate but ultimately both Stonegate and the competitor chose not to pursue the acquisition.  Visits to the company by the potential buyers were coordinated and orchestrated by Stonegate. The negotiations with each prospective buyer were subsequently undertaken. Stonegate provided a requested valuation of $30 million and indicated that the seller would not accept anything less. The end result was that the business was sold for S28.5 million cash. This extraordinary price was achieved for several reasons: Stonegate was able to secure the single most logical buyer for whom the acquisition had the greatest synergy in terms of purchasing and distribution economies as well as enjoying a complimentary fit of product line and manufacturing capability. The business being sold was worth absolutely the most to this particular buyer. Stonegate was able to discern that and convince the ultimate buyer that those synergies were worth paying for.  None of the buyers knew that the major competitor had chosen not to proceed. In fact, all of the buyers assumed that their competition was the major competitor. Stonegate obviously did not disabuse any of the potential buyers as to whom the real competition was. Stonegate's approach is to create a relationship with the potential buyer but not to make the potential buyer feel that they are in an outright auction process. This approach creates the opportunity for Stonegate to develop a rapport with the buyer. This more relaxed attitude and methodology has been demonstrated to be most effective in numerous circumstances.