WHEN A PE FIRM NEEDS HELP RETURNING A DISTRESSED PORTFOLIO COMPANY TO ITS GLORY DAYS

  • A PE firm was looking into acquiring a distressed business that had gone into bankruptcy
  • At the target, out-of-control costs, operational efficiencies, and flat top-line growth had eroded margins
  • The investors asked AlixPartners to conduct an operational due diligence and implement a whole-company transformation program once the acquisition was complete
  • The effort swiftly boosted margins at the newly acquired portfolio company, and ultimately led to a highly profitable exit for the PE firm just five years post-acquisition

Our unique approach enabled this PE firm to quickly restore their distressed portfolio company’s EBITDA performance to levels that attracted a buyer willing to pay a handsome price—one that nearly doubled the investment value at exit.

THE SITUATION: AN OPPORTUNITY TO TRANSFORM A DISTRESSED BUSINESS INTO A VALUE-CREATION POWERHOUSE

A PE firm that specialized in investing in distressed companies saw an intriguing opportunity in a previously successful direct-to-distributor food business that had fallen on hard times. With costs rising faster than revenues and management distracted by the company’s legal problems, inefficiencies had invaded the enterprise’s operations, and top-line growth had flattened. This battered EBITDA margins, and the company filed for bankruptcy.

The investors considered acquiring the target’s assets and working to restart its value-creation engine. Familiar with AlixPartners’ expertise in operations, restructuring, M&A, and crisis management, they asked us to conduct an operational due diligence while the target was in bankruptcy.

The goal? To identify revenue- and cost-improvement initiatives that might support a successful turnaround and exit. The PE firm decided to go ahead with the acquisition, and asked AlixPartners to implement the transformation program that came out of the due diligence and pre-close planning period.

Just seven months after the acquisition, implementation of the improvement initiatives delivered an almost $11 million boost to the portfolio company’s annual EBITDA. Equally impressive, just five years post-acquisition, our client sold the transformed business to another private investor—for roughly 75% more than they had paid. 

THE APPROACH: RIGOROUS END-TO-END SUPPORT

AlixPartners supported the PE firm through key stages of the acquisition and transformation effort.

Operational due diligence: Uncovering revenue- and cost-improvement opportunities

Using AlixPartners’ proprietary QuickStrike methodology and interviews with the target company’s management team, we diagnosed the target’s toughest business challenges, which fell into four major categories: 

  1. Customer pricing and profitability. As an example, prices paid by customers located at the greatest distances away from the company’s production facilities weren’t enough to cover the higher distribution costs incurred in serving those customers. 
  2. Purchasing. The company was spending too much on components including certain types of product packaging and equipment, as well as for contract labor and fuel.  
  3. Operations. For instance, fleet assets were underutilized seasonally, owing to overly optimistic sales forecasts and fears of missing out on a sale. Ineffective management of variable fleet costs led to high costs in servicing customers. 
  4. SG&A. For example, there were too many managers covering each of the company’s sales regions, and too many under-performing employees in various operating facilities.

Drawing on insights gained from this process, AlixPartners’ due diligence team identified improvement opportunities that could deliver near-term results essential for jumpstarting EBITDA performance improvements at the target.

We calculated that seizing those opportunities could deliver a collective $18-$25 million in annual benefits, including improvements in EBITDA, within five years.  With this goal, we defined a set of 40-plus improvement initiatives, distributed across the four categories.

 

Pre-close planning: Setting the stage early for investment success

To enable the target company to overcome its biggest challenges and quickly revive potential performance post-close, the PE firm needed to craft a plan before the close for successful implementation of the improvement initiatives. AlixPartners helped with this effort as well, setting up a disciplined governance structure for implementation that included:

  • A steering committee including representatives from the PE firm, the target company, and AlixPartners.
  • A interventionist program management office (PMO) led by an AlixPartners consultant, with a senior member of the target company’s management team serving in an active-partner role.
  • Workstream project teams comprising one AlixPartners consultant plus several team members from appropriate functions in the target company.

The PMO had a comprehensive set of responsibilities and goals to achieve, including developing initiative charters and matrixes assigning sponsors for each project. It also prioritized initiatives using criteria such as magnitude of impact, time to results, ease of implementation, and intensity of required resources and set up tools and systems for tracking and communicating progress on each initiative against the plan.

Accountability for achieving the expected improvements within the planned timeline was driven down to each workstream and individual leading that effort. 

We also developed action plans aimed at capturing the benefits calculated for each improvement initiative in the four workstreams. Additionally, we defined a timeline for actions to be taken during the first six months post-close. Such actions included:

  • Setting up a PMO meeting and reporting cadence and capturing quick wins within Month 1
  • Making adjustments as needed during Quarter 1 to exceed improvement targets
  • Developing plans for longer-term benefits (such as for a new ERP system).

Finally, to show our client that we were just as invested in their success as they were by showing our value through implementation expertise. We made a percentage of our service fee contingent on actual cost savings or margin improvements achieved in the target company during post-close. 

Value creation: Capitalizing on early planning and strategizing

The value-creation program designed for our PE client was aimed at capturing the full potential on offer from the improvement initiatives identified early on—across the target company’s entire operations. After reviewing the results of AlixPartners’ due diligence and pre-close planning, our client decided to acquire the assets on offer, and we set the pre-close plans in motion. 

Thanks to the disciplined governance model we had set up, implementation of the improvement initiatives proved successful at the newly acquired portfolio company.

Each of the four initiative workstreams delivered impressive results that translated directly into better EBITDA performance. For example:

  1. Customer pricing and profitability initiatives such as adjusting SKU-level pricing for the least profitable customers led to an incremental $620,000 margin improvement in addition to $5 million of planned across-the-board price increases.
  2. Purchasing initiatives including sourcing different types of product packaging from new suppliers, negotiating contract-labor rates, and obtaining discounts on fleet rentals boosted EBITDA to the tune of $2.63 million.
  3. Operations initiatives such as optimizing frequency and routing for customer deliveries and reducing the number of leased trucks enhanced EBITDA by $2.58 million.
  4. SG&A initiatives including rationalization of corporate, regional, administrative, and plant-operations staff resulted in a $4.86 million lift to EBITDA.

THE SOLUTION: TRANSFORMATION DISCIPLINE THAT KEPT DELIVERING

AlixPartners’ approaches and methodologies for providing end-to-end support for this investment resulted in a strongly governed transformation program that delivered measurable improvements quickly. The program began paying dividends almost immediately, and the portfolio company was able to sustain its EBITDA performance in the years after the acquisition, an achievement that enhanced the overall value of the investment. 

Lessons learned from the early rounds of transformation generated insights for additional improvements that could further benefit the company in all four workstreams.

In fact, when the AlixPartners team met with the company’s new CEO to present the outcomes achieved from the transformation program to date, the discussion included projects such as factoring equipment costs into customer pricing, further reducing packaging costs, implementing telematics for delivery vehicles, and automating pallet loading.

We also discussed the importance of empowering the company to strengthen its own internal capabilities for successful transformation. To that end, we and the CEO identified ways to ensure that company managers retained ownership of each change initiative going forward. Additionally, we explored ways to transition leadership of the PMO to the new CEO as well as knowledge gained from implementing the transformation program.

when it really matters alixpartners 2019

WHEN IT REALLY MATTERS: EBITDA IMPROVEMENT IN SEVEN MONTHS—AND A HIGHLY PROFITABLE EXIT IN FIVE YEARS

The performance improvement achieved at our client’s newly acquired portfolio company—an $11 million increase in annual EBITDA in just seven months—speaks volumes about the importance of implementation planning early in the investment game.

  • The outcomes of this case show how AlixPartners’ approach is distinctive in other respects as well. Specifically:
  • We support our PE clients throughout all stages of the investment lifecycle, including pre-transaction, pre-close planning, value creation, and achievement of full potential. 
  • We help clients with crisis management in all stages of the lifecycle—such as determining how to turn around a target that’s in bankruptcy or getting a struggling transformation program back on track at a newly acquired business.
  • We identify, drive, and help secure sustainable improvements in portfolio companies’ performance.
  • We work side-by-side with PE sponsors and their portfolio companies’ management teams to ensure that deals deliver the intended value. 

Our unique approach enabled this client to quickly restore their distressed portfolio company’s EBITDA performance to levels that attracted a buyer willing to pay a handsome price—one that nearly doubled the investment value at exit.

The performance improvement achieved at our client’s newly acquired portfolio company—an $11 million increase in annual EBITDA in just seven months—speaks volumes about the importance of implementation planning early in the investment game.

  • The outcomes of this case show how AlixPartners’ approach is distinctive in other respects as well. Specifically:
  • We support our PE clients throughout all stages of the investment lifecycle, including pre-transaction, pre-close planning, value creation, and achievement of full potential. 
  • We help clients with crisis management in all stages of the lifecycle—such as determining how to turn around a target that’s in bankruptcy or getting a struggling transformation program back on track at a newly acquired business.
  • We identify, drive, and help secure sustainable improvements in portfolio companies’ performance.
  • We work side-by-side with PE sponsors and their portfolio companies’ management teams to ensure that deals deliver the intended value. 

Our unique approach enabled this client to quickly restore their distressed portfolio company’s EBITDA performance to levels that attracted a buyer willing to pay a handsome price—one that nearly doubled the investment value at exit.

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