Pitch Best Small Cap Deal 2020: Torqx Capital Partners – Fabory

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Involved firms and advisors 

Involved firms and advisors buy side:
ING Bank (M&A Advisory), PwC (Tax Advisory and Financial Due Diligence), Houthoff (Legal Advisory Corporate M&A), Nielen Schuman (Debt Advisory), Torqx Capital Partners (PE Management)

Involved firms and advisors target:
Van Doorne (Legal Advisory Corporate M&A)

Involved firms and advisors sell side:
Rothschild & Co (M&A Advisory), KPMG (Financial Due Diligence), Loyens & Loeff (Legal Advisory Corporate M&A), Houthoff (Legal Advisory Corporate M&A)

Pitch

Brief description deal / Deal outline
At the end of June 2020 Torqx Equity Partners acquired all shares in Fabory from Grainger. After having owned Fabory for c.9 years, Grainger decided to focus on the maintenance, repair and operations (“MRO”) segment predominantly in its domestic/US market, therefore having the desire to carve-out Fabory as category specialist. Fabory is a leading specialist supplier of fastener solutions and fastener related products in the Benelux and offers a broad, high quality assortment to customers across Europe. 

Why should this deal win the Award for Best Small Cap Deal 2020?
A household name in the Dutch PE world with multiple buy-outs in the past was held by a listed US conglomerate. The complex carve-out, the chequered history and the strategic fundamental changes to be implemented made it a complex file where Torqx was able to accelerate its commercial and financial assessment and hence sign the deal during the heat of the first COVID-wave. Where many M&A activities came to a halt, Torqx underlined its ability to operate under challenging circumstances and its commitment to the deal by not requesting a financing condition.

As a financial investor, Torqx will be able to support Fabory in its ambition to further strengthen its position as specialist distributor in fasteners, to enhance the customer experience and to grow the group organically and through add-on acquisitions.  Torqx has extensive experience and a strong track record with technical distribution businesses. Moreover, this transaction provided Grainger with the opportunity to fully focus on the maintenance, repair and operations (MRO) segment, predominantly in the US.

The seller performed significant marketing effort with a great number of parties approached (both strategics and financial buyers), resulting in multiple NBOs early February 2020 (Round 1)

Rothschild & Co advised the seller on and managed all aspects of the transaction;

1. Extensive advice to Grainger on process and tactics, maintaining competitive tension throughout the process, despite uncertainties surrounding Covid
2. Designing, managing and executing a broad, but bespoke sale process, delivering highest transaction certainty to Grainger
3. Preparation of well thought through marketing materials, including teaser, coffee chat, information memorandum and management presentation to position Fabory as leading fastener specialist with ample organic growth opportunities through digital order channels and cross-sell initiatives into non-fasteners.
4. Assisting Fabory management on developing a credible stand-alone equity story, including M&A and ability to scale in a consolidated market as this wasn't a focus area under Grainger ownership 
5. Helping management to clearly communicate the expected (short-term) impact of Covid (e.g. on profitability and cash flow) to buyers
6. Run a full-service lender education process in parallel with Round 1 (pre-Covid) to provide prospective buyers with financing options for what was considered a relatively difficult credit
7. Utilised the global Rothschild & Co network to conduct an extensive initial pre-marketing exercise ahead of formal launch, covering strategics, financial buyers and family offices
8. Advising on the negotiation of legal documentation, including the Share Purchase Agreement and Signing Protocol, Transitional Services Agreement and EV to Equity Value bridge
9. Provided a clean exit for Grainger despite challenging market circumstances due to Covid impacting Fabory’s performance. 

Rothschild & Co successfully positioned Fabory, on a stand-alone basis, as leading fastener specialist with ample organic growth opportunities through e.g. digital order channels and cross-sell initiatives, complemented by the opportunity to benefit from consolidation in the fragmented market to further scale the business, something which was not actively pursued under Grainger ownership.

Deal rationale:
Fabory (fka “Borstlap Masters in Fasteners”) has a chequered history of private equity ownership, as emphasized by former owner HG Capital handing the keys to the Company’s financing banks in the aftermath of the credit crisis in 2009 after its buy-out from AAC Capital in a competitive auction NYSE-listed W.W. Grainger (MCap > $15bn) acquired Fabory in 2011 to establish a European platform. Grainger, however, never succeeded in overturning the Company’s declining performance, and recently decided to refocus its strategy on North-America, earmarking Fabory as non-core accordingly The transaction fits seamlessly in Torqx’ investment focus on operational turnaround cases, with a preference for corporate carve-outs. 

Torqx has identified areas of future value creation and will, together with management, take a hands-on approach in building out its position in a fragmented niche of fastener distribution in Europe.

What is the impact of this deal for the company?
Torqx has a proven track record in the technical distribution business. Torqx will help Fabory to strengthen its position as leading fastener specialist in its core markets and achieve its full potential by enhancing the customer experience and growing the group organically and through add-on acquisitions.

Rothschild & Co successfully positioned Fabory, on a stand-alone basis, as leading fastener specialist with ample organic growth opportunities through e.g. digital order channels and cross-sell initiatives, complemented by the opportunity to benefit from consolidation in the fragmented market to further scale the business, something which was not actively pursued under Grainger ownership.

What is the impact of this deal for the direct stakeholders?
Fabory returns to its Dutch roots under the ownership of Torqx.

Clients will benefit from a more targeted and tailored product offering. Whereas employees will again be part of a winning formula, like it was in the days of the family Borstlap as well as AAC Capital.

Clean exit: Rothschild & Co delivered a clean exit for Grainger despite challenging market circumstances due to Covid impacting Fabory’s performance. After having owned Fabory for c.9 years, Grainger decided to focus on the maintenance, repair and operations (“MRO”) segment predominantly in its domestic/US market, therefore having the desire to carve-out Fabory as category specialist.

What is the impact of this deal on society?
Fabory employs over 1,100 employees in 11 countries and has over 60,000 customers.The Masters in Fasteners will offer high quality and safe products tailored to the situation’s needs.

Increased focus on the Benelux market: Fabory was acquired by Dutch based private equity house Torqx Capital and the standalone plan is expected to centre Fabory’s efforts, in the first instance, on the Benelux market, whilst the company is currently active in 11 countries. This coupled with ongoing efficiency measures to right size the cost base will form a strong fundament to be able to scale the business to ultimately become a pan-European leading fastener specialist.

What was most complex about this deal?
Other interested parties were well under way in their DD process, when Torqx and its advisors were fully engaged. In less than two weeks and amidst the COVID-lock down, due diligence was completed and the deal was signed

ING Corporate Finance provided comprehensive buy-side execution support to Torqx extending scope to the likes of assessing Fabory’s post-acquisition strategic development options. Seamless collaboration between all teams resulted in a swift execution process with the ability to move quickly on the complex case provided an unique angle in getting a firm offer to the seller, which is even more remarkable as everybody was working from home throughout the entire process. 

Finally negotiating final terms with the seller in the midst of the COVID-19 outbreak and despite the associated adverse impact on the Company’s current year trading and near term outlook.

Covid: the start of Round 2 (i.e. due diligence and contract negotiations) coincided exactly with the beginning of the Covid outbreak. Rothschild & Co successfully maintained competitive tension throughout the entire process, despite local lockdown measures imposed. Rothschild & Co also helped management to clearly communicate to bidders the expected (short-term) impact on profitability and cash flows. This ultimately resulted in the receipt of a handful of highly credible binding offers (fully equity financed)

Fabory history: Fabory experienced a significant decline in revenues and earnings in the period between 2012 and 2014 due to the combination of loss of market share (customers switched to competition as a result of pricing transparency in the market) and cost base (opex to sales ratio too high)

Financing: Rothschild & Co ran a full-service lender education process to provide prospective private equity buyers with available financing options for what was considered a difficult credit (distribution model, low margins, relatively high opex to sales ratio, troubled history etc)

Entanglements: despite Fabory acting on a relatively stand-alone basis already, Grainger and Torqx still had to agree on a Transitional Services Agreement in parallel to the usual contract negotiations.

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