'Roll-up' suppliers are rolling downhill

Robert Sherefkin, Automotive News

A strategy that fueled massive consolidation of the US automotive supply base in the 1990s has come unhinged. After some heady success in the early years, the "roll-ups" have pretty much rolled into turmoil.

Dura Automotive Systems Inc., an early example of the so-called roll-up merger, announced a $100 million restructuring on 9 Feb. that could close five to 10 of its 60 factories. A day later, another roll-up company, J.L. French Automotive Castings Inc., sought Chapter 11 reorganisation. A year earlier, a former Dura sister company - Tower Automotive Inc. - had sought court protection.

All three companies underscored the grow-at-all-costs roll-up strategy used by financiers in the 1990s to win more Big 3 outsourcing business. Typically, the strategy involved investors who made serial acquisitions of parts suppliers to offer one-stop-shopping for automaker customers.

Dura, French and Tower, which make a variety of metal parts, all have ownership or management links to former Minneapolis investment firm Hidden Creek Industries Inc. They also share the tarnished legacy of a supply-sector strategy that has largely been abandoned.

"The time of the roll-up may be passing," says turnaround specialist John Groustra, a partner with Conway MacKenzie & Dunleavy PC, of Birmingham, Michigan But he says it's not clear what strategy will supplant it for the next round of consolidation.

Rolled over

Other roll-ups that became top suppliers of certain parts - only to come undone - include Intermet Corp., Harvard Industries Inc., Citation Corp., Hayes Lemmerz International Inc. and others. All sunk into Chapter 11.

The strategy failed because many roll-ups withered under too much debt, heavy dependence on General Motors and Ford Motor Co., post-acquisition integration problems and high raw-material prices, Groustra says.

But in the heady climate of the 1990s, it seemed like such a good idea.

Automakers encouraged Tier 1s to get big enough to handle the outsourcing of big chunks of the vehicle, but then reversed course and reassumed some of those responsibilities.

Not all roll-ups were failures, says investment banker John Eberhardt, managing director of Coutant Capital Associates LLC, of Princeton, N.J. He cited Metaldyne Corp., of Plymouth Township, Michigan, as a survivor.

Still, more than a dozen Tier 1 suppliers sought Chapter 11 protection last year, according to Automotive News research. Financial problems of US auto parts makers are a constant threat to auto assembly lines.

Industrialist Tony Johnson was among the first to champion the roll-up strategy through the Hidden Creek organisation he founded in 1989. Before he retired in 2003, Johnson told an interviewer he oversaw 55 acquisitions for his five portfolio companies.

Johnson, 65, an engineer with an MBA from Stanford University, kept costs low at his operating companies through a centralised management team of just 10 people. Then he executed initial public offerings for Dura in 1996 and Tower in 2004.

Hidden Creek then gradually sold off its shares in the two companies. Hidden Creek also provided management services for J.L. French, but the majority ownership was held by Toronto investment firm Onex Corp., a partner of Hidden Creek.

In 2004, the Hidden Creek-Onex partnership dissolved. Johnson left the partnership that year. He resigned his board seat at Dura in 2004. He serves as chairman of Tower. He also is a member of J.L. French's board.

Johnson did not return telephone calls. Don West, a manager with Onex, declined comment.

Early success

Johnson enjoyed early success by acquiring a small automotive trim company in 1990. Five years and five acquisitions created Automotive Industries Inc., a trim company with annual sales of more than $900 million. Johnson sold it to Lear Corp. for $626 million -- a rate of return to shareholders of more than 60 percent, according to a company profile.

Both Hidden Creek and Onex sold their interest in Dura and Tower by 2004. The partnership's stake in J.L. French evaporated this month with its Chapter 11 filing.

Tim Kellner, a J.L. French vice president, said the Sheboygan, Wis., company "was not optimally integrated and ultimately unable to service its debt." It didn't help that GM and Ford account for 80 percent of the sales of the giant aluminum die castings and assembly supplier.

Tower, of Novi, Michigan, is facing a possible strike. Tower has asked a bankruptcy court to throw out its contracts covering 3,000 workers. The UAW and other Tower unions have already approved strike votes at nine plants if Tower wins such a court approval. Ford and the Chrysler group are Tower's biggest customers.

Investors normally applaud moves such as Dura's recent action to spend $31 million to pay down debt. But Dura faces short-term earnings and cash flow issues as it launches a major restructuring that will cost $100 million in cash. Standard & Poor's Corp. on Feb. 9 downgraded Dura's credit rating from B to B- and noted the company's $1.2 billion in total debt.

Dura CEO Larry Denton did not return telephone calls seeking comment.

From Automotive News (A Crain publication)