Strong Support for Management Initiatives Expands Production Capacity and Boosts Profits

Situation Analysis

Mark Martinez founded Ohio-based Primary Packaging, Inc. (PPI) in 1990 as a manufacturer of heavy-duty polyethylene packaging and grew it into a leading manufacturer of packaging for insulation, lawn, and garden, and other industrial and consumer products.

In 1996, Martinez invested $2 million in a new production facility. By 2000, the Company realized a 30% increase in sales, which prompted a $3 million capital expansion in 2001. These initiatives were funded almost entirely through bank debt, a significant portion of which Martinez personally guaranteed. His investment paid off with dramatic sales growth of approximately $10 million through 2002. Still, Martinez knew that driving the next round of growth would entail additional investments in production equipment and information technology. Martinez had reached an inflection point between his desire to continue growing the business and his willingness to keep shouldering the debt required to make necessary investments.

Indeed, Martinez’s appetite to assume financial risk was tempered by a desire to achieve personal liquidity and diversify his holdings. He also wanted to provide an adequate supply of capital to fuel the Company’s continued growth – and he sought to maintain an equity stake and managerial control over its operation. Therefore, Martinez sought a strong financial partner who valued the Company’s existing culture and incumbent management team and was willing to help nurture PPI’s organic growth.

Finding The Right Private Equity Partner

MCM Capital Partners (MCM) is private equity firm based in Cleveland, Ohio that manages committed capital funds on behalf of institutional investors and high net worth individuals. MCM seeks to invest in growing lower middle-market companies with revenues between $10 million and $50 million. MCM’s General Partners, which include Mark Mansour and Bobby Kingsbury have more than 30 years of experience leading management-led buyouts, recapitalizations, generational changes in ownership, and the acquisition of corporate divestitures. Working in conjunction with the General Partners to add value to investments is an Advisory Board consisting of prominent current and former corporate executives. This affords portfolio companies a unique opportunity to leverage the expertise and insight of corporate executives who have run multi-billion dollar operations through membership and involvement on their corporate boards.

Since 1992, MCM and its General Partners have been involved in deals representing $500 million in annual revenues. MCM currently has more than $125 million under management and has successfully invested in and grown nearly 30 companies.

Martinez approached several private equity firms during 2002, hoping to find a stable, experienced partner that shared his vision for the Company and offered the resources necessary to help him achieve it. Concurrently, MCM’s General Partners identified the flexible packaging products industry as ripe for investment of capital. Before long, they met with Martinez, toured PPI’s 50,000 square-foot facility, conducted additional due diligence, and structured a leveraged recapitalization to accomplish each of Martinez’s goals.

A recapitalization is a financial transaction customized to provide existing shareholders a substantial amount of liquidity while allocating a large portion of equity – typically 20 to 40 percent – to selling shareholders and the incumbent management team. For Martinez, this offered several benefits:

• Substantial Personal Liquidity: Martinez received a large cash sum at close, which allowed him to diversify his net worth and ensure his long-term financial health.
• Preservation of Incumbent Management and Management Responsibilities: The deal kept Martinez in place as the day-to-day leader of the Company and preserved operating responsibilities for his management team.
• Personal Equity: MCM provided Martinez with a 25% equity stake in PPI at closing, providing him the opportunity to share in the Company’s growth.
• Employee Equity: MCM also established a stock option plan for the management team. This afforded employees a personal stake in the Company.
• Freedom from Future Debt: The recapitalization eliminated the need for Martinez to personally guarantee any bank debt. This enabled him to focus his energies squarely on managing the Company’s next round of growth.
• Adequate Capital for Anticipated Growth: MCM’s recapitalization provided follow-on capital necessary to support investments in PPI’s future growth.

Martinez was comforted by MCM’s long track record of success in growing other portfolio companies, and he appreciated the firm’s strong support of PPI’s incumbent management. The two parties agreed to terms in principal and finalized a transaction in August 2002.

Implementing Management’s Growth Plan

Immediately thereafter, MCM met with Martinez and other Company executives and formalized a plan to sustain the Company’s growth. MCM created a board of directors for PPI and appointed members of its own Advisory Board to serve on it, offer fresh perspectives, and identify value drivers within the Company. Additionally, MCM encouraged Martinez and other executives to hire additional sales staff and make capital expenditures that would enable the Company to boost revenues. As Poffenberger offered, “Our role is to support incumbent management teams. Whether it’s a buyout or recapitalization, we let them run the business by ensuring that the necessary organizational elements are in place.”

Soon after the recapitalization, the flexible packaging industry experienced substantial increases in raw material pricing that adversely affected the Company’s profitability. However, MCM encouraged Martinez and his team to implement their plans. That commitment, combined with MCM’s investment in additional human and equity capital, allowed PPI to weather the storm. The Company grew dramatically, regained its profitability, and today is positioned to continue expanding.