GRAND RAPIDS — After purposely avoiding deals in the automotive industry, private equity firm Blackford Capital has shifted its strategy with the acquisition of a Southeast Michigan supplier.
The Grand Rapids-based firm’s Michigan Prosperity Fund I closed on a deal for Chesterfield Charter Township-based Davalor Mold Co. LLC in late July, its first foray into the notoriously cyclical automotive sector.
“The management team (at Davalor Mold) has been at this a very long time,” Blackford Managing Director Martin Stein told MiBiz. “The senior managers have been in the business for 25 years on average. They know the customers and the products. It’s that sort of technical knowledge and awareness that lets us believe we’re going to take that and expand it considerably.”
Davalor Mold, a Tier-2 automotive supplier serving the major OEMs, manufactures intricate plastic injection molded components for vehicle safety systems such as seat belts.
Overall, Blackford Capital sees a growth opportunity in the global plastics market for the automotive industry, especially as automakers continue to shave weight from their vehicles to meet federal fuel economy regulations.
Additionally, industry analysts have struck a bullish position on the plastics market. Global production of plastic automotive components is expected to more than double from 8.7 million tons in 2014 to 18 million tons in 2022 — representing a $53.8 billion market, according to Delaware-based research firm Global Market Insights Inc.
In addition to the growth in the plastics market, Stein predicts the company’s safety components will evolve and become a larger focus in the face of emerging technologies such as automated vehicles.
“We want to be in a position to take advantage of that,” he said.
In the short term, Blackford Capital plans to search for an international add-on acquisition to expand Davalor Mold’s overseas business, Stein added.
The automotive supplier employs 90 people at its Chesterfield Township facility.
MANAGING THE CYCLE
Despite concerns the automotive industry has reached its peak, Blackford Capital believes Davalor Mold’s niche in plastic injection molding and its exposure to a variety of OEMs will shield it from market fluctuations.
“It’s entirely possible that we could grow our way through any recession,” Stein said. “The problem is when you’re 40 percent market share and you decline. We believe the company has the foundation to rapidly accelerate their growth trajectory.”
Analysts have backed off on their automotive industry growth projections in recent months as a result of international instability and other factors. However, most forecasters still predict modest growth in the sector through 2018.
North American light vehicle production is expected to reach 18 million units in 2016 and increase by 100,000 units per year until it reaches 18.2 million units in 2018, according to data from IHS Automotive Group, a Southfield-based market research firm.
For Davalor Mold, the decision to sell came as its ownership, which includes two brothers, prepares to transition away from the business and eventually retire. Davalor Mold’s ownership will stay on through the transition process and continue to help lead the business for the time being, according to Stein.
“There comes a time in an entrepreneur’s life when they need to think through succession,” Stein said.
Representatives from Davalor Mold were not available for comment at the time this report went to press.
Davalor Mold marks the eighth company Blackford Capital has added to its Michigan Prosperity Fund I. The fund focuses on Michigan-based maturing manufacturing companies with annual revenues between $20 million and $100 million and whose owners want to stay on after the deal.
Terms of Blackford Capital’s deal with Davalor Mold were not disclosed, but an affiliate of the PE firm sought to raise up to $5 million in equity from investors for the deal, according to a federal securities filing.
AUTOMOTIVE DEAL MARKET
Blackford Capital’s decision to enter the automotive industry comes as deal volume in the sector cooled over the first half of 2016 compared to the fervent pace of deals seen last year.
Automotive deal volume fell 7 percent in the first half the year compared to 2015, while deal value fell 37 percent over the same period, according to a report from PricewaterhouseCoopers LLP.
Rajesh Kothari, a managing director of Cascade Partners, a Southfield-based investment banking firm, attributes the decrease in deal activity among automotive suppliers to private equity and other investors being concerned that the industry has reached the peak of its cycle.
“We’re definitely seeing a little bit of cooling in the interest in some automotive suppliers, depending on where they are in the segment of the market,” Kothari said.
Despite the slight slowing in deal activity this year, multiples continue to be strong, particularly for well-structured, technologically advanced manufacturers, he said. Multiples for middle-market, highly specialized companies hover between five and seven times earnings before interest, taxes, depreciation and amortization (EBITDA).
For more commodity-based companies, those multiples shrink to four times EBITDA and lower, Kothari added.
For his part, Kothari expects deal volume to increase in the second half of the year, although the trend has shifted somewhat from sellers to buyers.
“We’re seeing a lot of buy-side interest in recent months more than anything else,” he said. “Buyers are saying, ‘We have more cash.’ The dynamic we’re seeing more and more is there’s a growing interest in the opportunity to grow through acquisition.”
As a whole, Kothari remains optimistic about the automotive industry and the larger U.S. economy in general.
“There’s no sign in the U.S. economy domestically that things are slowing down,” he said. “We’re growing at a slow and steady pace and that’s helped people not go over their skis. The (vehicle) fleet is still old, people are buying new cars — there’s no sign that’s going to back off.”