On December 5, 2016, Sentinel Capital Partners, a New York City-based private equity firm, issued a press release announcing it had invested in Sonny’s Enterprises Inc. through a recapitalization. Terms were not disclosed.
Recapitalization is a type of reorganization that occurs when there issufficient motivation to make a substantial change in a company’s capital structure — the way a corporation finances its assets through some combination of equity, debt, or hybrid securities.
Reportedly, Sonny’s CEO Paul Fazio will continue to run the company while the Fazio family will maintain a substantial ownership stake.
According to Fazio, “The industry is changing and expanding at a faster pace than we have seen in the past. With Sentinel behind us, Sonny’s can more rapidly deliver the innovations our clients need to grow their businesses.”
Sentinel Partners’ Scott Perry stated that they were very excited about the opportunity to partner with Sonny’s and saw a bright future for Sonny’s growing both organically and through acquisitions.
Arguably, this implies Sonny’s will somehow expand the size of its operations, make capital investments in advanced manufacturing and/or buy smaller, less mature suppliers. This is atypical for growth equity as opposed to leveraged buyout strategy.
Consider private equity firm Trivest’s acquisition of Ryko Solutions Inc. in 2010. At that time, Ryko reportedly had sales revenue of about $67 million and employed about 350 people.
After investing $2.5 million a year in advanced manufacturing and acquiring MacNeil Wash Systems and its 40,000 square foot plant in Canada, Ryko doubled its sales revenue and increased its workforce to 500.
So, what was the motivation for Ryko and Trivest to partner? Private equity invests growth equity in middle- and lower-range companies to make money for itself and stakeholders through the added value created in the process.
For example, Boston Consulting Group finds 2/3 of private equity deals resulted in companies’ annual profits growing by at least 20 percent, and nearly half the deals had profit growth of 50 percent a year or more.
Private equity deals are usually measured in hundreds of millions of dollars and deals of less than $100 million are rare. Equity firms often expect a return in five years (exit strategy).
Why did Ryko need to partner? After all, it was already a perennial “top four” manufacturer of in-bay automatics, made a conveyor and other types of equipment, and had built over 14,000 washes.
Arguably, the reason is this wasn’t enough.
For example, in the late 1990s and early 2000s, Ryko manufactured the VT2000 conveyor that was installed mostly at gasoline sites like Chevron. The VT evolved into the “Rocket” model. Today, the conveyor category is no longer listed in the system’s page of Ryko’s corporate website, ergo Ryko owns MacNeil through Trivest.
What precipitated this demand or lack thereof? Consider Shell USA’s experience. In 1999, the company developed an unmanned conveyor program when it decided to revitalize its network of washes at retail petroleum outlets.
Shell’s Formula Finish car wash program had highly visible architectural elements, grey and bright yellow colors, conveyor wash technology, and proprietary chemicals.
The pilot program was tied to Shell’s acquisition of Texaco assets (Star Carwash) and Royal Dutch Shell’s decision to upgrade the combined fleet of 24,000 petroleum sites. After rolling out 50 or so branded washes, Shell changed brand standards and the program fell through the cracks.
Now that Big Oil is out of the retail gasoline selling business, no one has stepped up to do the heavy lifting necessary for a program like this.
Several years following this, came higher sustained prices for gasoline. Next, financial and real estate market bubbles burst and then came the great recession.
Ostensibly, changes in consumer driving and spending habits, tough lending requirements, and other effects of all this put a damper on industry wash revenues and equipment spending. The result was acceleration of the bankruptcy cycle and a significant decline in the number of car wash establishments — primarily washes at gas sites and self-serve locations.
So why does Sonny’s need a partner? After all, the company boasts it is the leading manufacturer of conveyor systems with 6,000 operators choosing its equipment worldwide. Could the reason be this isn’t enough?
To paraphrase Fazio: Partnering with Sentinel will allow Sonny’s to accelerate its growth record and expand the number of products and services to its clients.
Sonny’s clients are conveyor car wash owners, meaning mostly mom-and-pop investors and family-owned territorial chains. What Sonny’s does not have much of is a stake in the declining self-service segment and the 30,000 or so remaining washes at gas sites that dot the country, mostly in-bay automatics.
So, what growth is Sonny’s chasing? Analysts expect industry wash revenues to grow at 3 percent through 2018, and pundits expect orders for 500 conveyors annually.
Is the investment for the purpose of keeping production in the United States? It’s no secret that a large number of firms have chosen not to manufacture certain goods in this country.
Moreover, as president-elect our new president threatened to impose an onerous tax on companies who would build plants and move jobs offshore and then return products to sell in United States.
So, the purpose of private equity might be to mitigate the political risk involved with making car wash equipment in another country and then selling it here.
On the other hand, Sonny’s could be on the path to vertically integrate and buy smaller firms like its previous acquisition of Compuwash. Perhaps it will acquire a company that makes buildings, belt conveyors, or license-plate-recognition technology. After all, this is where the industry is trending.
Unfortunately, strict confidentiality surrounds most privately held companies, so I can’t shed any light on this.