Published in Finance
Bruce Chapman, left, and Keith Chapman, right, Midwest Timer Service Inc. Bruce Chapman, left, and Keith Chapman, right, Midwest Timer Service Inc. PHOTO: KATY BATDORFF

Deal for Lectro breathes new life into Midwest Timer

BY Saturday, October 13, 2018 06:53pm

WINNER: Deal of the Year, Less than $25 million

Faced with an industry sea change and the loss of a major customer, Benton Harbor-based Midwest Timer Services Inc. needed to take action to remain a growing business.

The realization hit the company hard when it lost a contract to supply electromechanical timers to appliance maker Whirlpool Corp.

“We needed a different product,” said Bruce Chapman, co-owner of Midwest Timer. “Electromechanical timers are more or less going away. They’re going to continue to decline.”

The decline stemmed from appliance manufacturers “obsoleting” electromechanical timers in favor of digital components. While electromechanical timers still had a place in commercial applications, Chapman and his partners realized the business was “never going to grow.”

“There’s nowhere to take it. It’s never going to be that $10 million operation again,” he said.

Midwest Timer Service Inc.

  • Top executives: Co-owners Bruce Chapman and Keith Chapman
  • Annual sales: Roughly $12 million
  • Total West Michigan employees: 32; expects to add 12 to 15 people in 2019 based on the new Siemens project, which is a product of the acquisition
  • Business description: Manufacturer of electromechanical timers for a range of home appliances that moved into the electronics market and diversified into industry control panels for commercial building automation systems. Midwest Timer is a third-generation family-run and family-owned business, operated by Bruce and Keith Chapman.
  • Best practices for effective dealmaking: “The best practices that we, alongside Patrick Robey and the Calder team, used include identifying key issues early in the deal and working through those as quickly as possible so as not to waste time late in the process, ensuring that you have a strong pipeline of companies to consider before moving forward on the one, putting in place a strong team of advisers who will represent you well throughout the transaction, and ensuring you not only have a strong deal and structure put together, but that you also have a detailed operational and strategic plan that can be implemented immediately post-acquisition. You need to know what you’re getting into before you’re into it.”
  • Advisers: Calder Capital LLC (financial), Rhoades McKee PC (legal), Plante Moran PLLC (accounting), PNC Bank (banking), DHJJ (inventory count analysis), and Machinery Valuation Specialists LLC (valuation)

To combat the declining sales in its legacy business, Midwest Timer opted to acquire Lectro Components Inc., a Carol Stream, Ill.-based distributor of electronics components and products for the building automation industry, including transformers, multi-voltage relay modules and power supplies.

The deal for Lectro Components positioned Midwest Timer “out in front” of a drastically shifting business model, said Chapman, who owns the company with his brother, Keith Chapman.

“One of the biggest things that interested us in Lectro was the fact that they were outsourcing some manufacturing to a related party,” he said. “We looked at that and said, ‘That manufacturing that’s being outsourced to that related party: We can do that.’ It’s a good fit.”

Midwest Timer finalized the Lectro Components acquisition in December 2017. The deal is recognized as a winner in the 2018 MiBiz M&A Deals of the Year Awards in the category for transactions valued at less than $25 million.

Grand Rapids-based M&A firm Calder Capital LLC advised Midwest Timer on the transaction, and helped line up financing for the deal.

After receiving “some good interest” from lenders to back the transaction, a deal with one lender fell apart in the eleventh hour, said Patrick Robey, director of corporate development at Calder Capital.

“We had to scramble in mid to late November,” he said, noting the parties aimed to finish the deal by Dec. 20 — before the New Year.

“It was quick,” he said of the deal, noting that Midwest Timer gave the former owners of Lectro a 15-percent stake in the company to get the deal to a close.

“We had to get a little bit creative in terms of how the (former owners) earn that equity (and) how it’s structured over time,” Robey said. “We had to lock those guys down. Without those guys, we couldn’t have done this deal.”

BACK ON TRACK

Since completing the acquisition, Midwest Timer entered the industry control panel board business, winning a bid to manufacture 3,000 units for Germany-based Siemens AG. According to Keith Chapman, Lectro will provide components for the industry control panels, which will be manufactured in-house by Midwest Timer.

“We’ve already taken out (one of our) timer lines (because of) this new 3,000-panel opportunity,” Keith Chapman said. “This is a building market for us. It’s our way to stay viable, because the timer business, we see it dropping off every year. … Panels are not a huge percent (now), but we see that as our future.”

The deal with Siemens, a global conglomerate of technology products, is worth almost $2 million in sales, he said.  

At that level, the industry control panel business could “change the dynamic entirely” for Midwest Timer, as well as create symbiotic opportunities for Lectro, according to Bruce Chapman.

“That puts us in the big league,” he said of the contract.

Midwest Timer, which generates $11 million to $12 million in annual sales, will approach the industry control panel business with a similar “assembly line” strategy as its electromechanical timers, Bruce Chapman said.

“What’s our core expertise? It’s manufacturing. How do you streamline the process? What we looked at is starting up an assembly line where each operator has maybe 25 functions, and this will allow for good quality and quantity,” he said.

The company also plans to move Lectro Components’ Illinois warehouse into Midwest Timer’s 70,000-square-foot facility in Benton Harbor.

The move will allow the company to be more vertically integrated, he said, noting that it’s also cheaper to operate in Southwest Michigan than it is in the Chicago area.

With the consolidation and the new opportunities, the partners believe the company is positioned to compete in the future.

“We knew we were losing Whirlpool production way in advance — a little sooner than we had hoped, but we knew it,” Bruce Chapman said. “We saw it coming, and we were looking for business opportunities long before we lost Whirlpool production. That’s the key to success: (managing) change.”

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