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ABC & Co. 250 Vesey Street New York, NY 10281-‐1330 Dear Michael Rolland,
We are Team6 Capital Partners, a group of investors and are very interested in making a bid for the acquisition of Manchester Tank. We are looking to make a bid of $43,000,000 for 51% of Manchester Tank stock. The Reifschneider brothers have created an incredible market dominating company. We believe combining our expertise in the industry with their wealth of knowledge from Manchester Tank can create an excellent team for future success.
There are opportunities for Manchester tank both domestically and internationally. Domestically we feel the current management team has created the best product out and captured a significant amount of market share. Because the company has such a saturated market share in the U.S. we believe there is more opportunity to expand internationally. Expanding to international markets will be our primary growth strategy.
Maintaining Manchester Tank’s corporate culture is extremely important to us. We are looking to work with management to expand while keeping the same company culture. Our hopes are to work with the brothers for the next 2-‐3 years and as they are ready to transition out of Manchester Tank we will be able to continue and improve on the legacy they have created. We are looking to provide a competitive bid to win this deal, but still provide the company with enough cash flow to execute our strategy. The strategy is mutually beneficial for both parties. Management will receive the liquidity they desire, keep equity in the company and will have the opportunity to work with us for the next few years.
I. Strategy
1. Management Team-‐ We would like to work with the current management team in expanding and improving Manchester Tank. We want management to work with us in expanding international operations more aggressively. Senior management will need to be the face of Manchester Tank in establishing new partnerships internationally. We want to work with senior management in order to establish a relationship with the existing and new customer base.
2. We would like to add one member from our investment group as the Senior Vice President of Corporate Strategy. His primary role will be to work with the current management team to execute our current strategy in place. He will work to establish relationships with new customers internationally and implement the MRP system.
3. Domestic Market a. Our approach to the domestic market will be to keep management’s current growth
strategy. The Company currently has the premier product in the industry and has the current market share to show it. The dominance in the market is both an opportunity
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and a risk for us as investors. While the current share has created a dominant cash cow company, we are not as quite as optimistic as management in their ability to grow domestically. We feel that with such a large market share, the company will continue to grow with the industry at about 6-‐8%.
b. We will look to renegotiate prices with our suppliers. As we expand internationally and we will be providing them with an increase in additional business. For this additional business we would like to work with our suppliers to negotiate prices and improve margins.
4. Expand internationally to South America, Latin America, Australia and New Zealand. a. Our customer focus will be to both large manufacturers (i.e. customers like Sunbeam)
and to distributors. We have attributed $800,000 each year in our projections for additional sales representatives and managers for the international locations. See the projected financials for further details.
b. Manufacturers-‐ We are going to hire additional sales representatives to focus on international expansion. Their commission structure will be linked primarily to bringing in new business from their designated region. We will be looking to sell our products that are components of larger equipment. For example, selling gas tanks that are assembled with gas grills.
c. Distributors-‐ In order to get our product to a wider range of smaller customers we are looking to target distributors that have access to distribution channels. It will be the senior vice president of corporate strategy’s responsibility to establish these relationships. The products sold to the distributors will be standalone products (i.e. the 400lb. propane tanks).
d. The reason for the separation in products sold between Distributors and manufacturers is the distributors will more than likely receive cheaper prices in order to sell the product to the end customer. We do not want to be selling the same product cheaper to the distributor and more expensive to the manufacturer.
5. Implementation of the MRP system a. One of the primary strategies will be fully implementing the MRP II within the first year.
The Company has seen significant improvements in efficiencies and cost savings by implementing the system in the Elkhart plant. We will look to implement the system across the company to streamline Manchester Tank’s processes.
6. Plant capacity a. Expansion internationally will quickly increase the demand for products at our
manufacturing facilities. To service the increase in demand we will begin to add second and third shifts at each location as needed. We feel that because most plants are operating far under their current capabilities, adding an additional plant will not be necessary for a few years out. Additionally, the implementation of the MRP II system will help increase efficiencies and better prepare Manchester tank for international expansion.
7. Marketing Strategy
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a. MT CEO will be asking for a reference to Sunbeam, Amerigas and top 2 distributors and approach the leading gas grill manufacturers, propane marketers and distributors in Argentina, Brazil, Chile and Caribbean, Australia and New Zealand. These leading US companies being MT’s top customers will provide a strong brand endorsement about MT’s products in these emerging markets.
b. The SVP of Corporate Strategy will be responsible for getting new international customers. He will be representing MT at the trade shows in the Latin America countries.
c. Once these new relationships turn into customers, we will appoint one regional sales manager for Latin America and one for Australia / New Zealand to manage these accounts.
II. Valuation
1. Bid Price-‐ We are bidding $43,000,000 for 51% of the Manchester Tank stock. This bid price is based on our analysis using the discounted cash flow method, enterprise value and comparable transactions. We believe our bid will be competitive and includes a control premium for taking controlling interest of Manchester Tank. .
2. Comparable Analysis-‐ We examined a number of different comparable companies in the manufacturing industry. There is a wide range of multiples based on the size of the company. We removed outliers from our analysis. We took the median values for these comparable companies using revenue multiples of .9x, an EBITDA multiple of 6.8x and an EBIT multiple of 9.1x. The following are the multiples we have found in our research:
Table 1
We made adjustments to the historical financial statements (See Table 6) including the gross margin, taxes and SG&A expenses. The gross margin was reduced as we do not want to rely on improved margins from price increases. The comparable analysis results in a $102,000,000 valuation for the entire company. We used a 20% discount for the comparable analysis. The comparable analysis came in higher
Summary Statistics TEV/Total Revenues LTM -‐ Latest TEV/EBITDA LTM -‐ Latest TEV/EBIT LTM -‐ LatestOlympic Steel Inc. (NasdaqGS:ZEUS) 0.3x 4.2x 4.7xSteel Dynamics Inc. (NasdaqGS:STLD) 1.2x 4.9x 5.9xCommercial Metals Company (NYSE:CMC) 0.4x 5.0x 5.7xAK Steel Holding Corporation (NYSE:AKS) 0.4x 5.6x 10.4xPaul Mueller Co. (OTCPK:MUEL) 0.3x 5.9x 9.9xSchnitzer Steel Industries, Inc. (NasdaqGS:SCHN) 0.7x 6.3x 7.5xCarpenter Technology Corp. (NYSE:CRS) 1.5x 6.6x 7.5xChart Industries Acquisition 1.3x 8.3xReunion Industries Inc. (OTCPK:RUNI) 0.9x 8.9x 12.7xChart Industries Inc. (NasdaqGS:GTLS) 1.3x 9.0x 12.4xRobbins & Myers Inc. (NYSE:RBN) 1.4x 13.2x 18.5x
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than we could finance based on our free cash flow projections. Here is the Median value for revenue, EBITDA, and EBIT multiples:
Table 2
3. DCF Model-‐ In our projections, we have included adjustments and investments based on our strategy. We felt that although management was exporting internationally, there was not a large effort to expand quickly. International expansion is our primary value-‐ add. In the projections we have added $800,000 for new sales representatives. This number is 2 sales representatives and 1 manager for each of the locations: Caribbean, New Zealand and Australia, and South America. This is a total of 8 additional sales representatives and 4 managers. The Caribbean will receive one team, New Zealand and Australia another, and South America will receive two full teams as we feel this is the largest potential market. International sales were only 2% of total revenue. By year 5 we hope to have international sales as 20% of gross revenue. We feel our marketing strategy will allow us to land similar customers to Sunbeam and Amerigas. The additional of just 1 or 2 of these customers a year across all regions will greatly increase international sales. We have also added our Senior Vice President of Corporate Strategy’s salary of $150,000 into general and administrative expenses. All domestic sales were broken down by product line based on the market share, industry growth, management’s projections and any other factors presented in the Dealbook. Here are the sales projections for international expansion and domestic growth by product line.
Summary StatisticsMean 0.9x 6.8x 9.1x
Total Revenue Adj. EBITDA EBIT1995 $141,729 $14,043 $15,412Mean $117,517 $90,811 $128,060
RangeMean $112,129
Private Co. Discount @ 20% $89,703
Implied ValuationManchester Tank
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Table 3
Domestic 98%Historical Projected
1995 1996 1997 1998 1999 2000RV Cylinders 14,778 15,517 16,293 17,108 17,963 18,502 Gas Grill 31,651 36,399 40,767 44,843 48,431 52,305 Mass Merchandising 6,239 6,738 7,209 7,570 7,948 8,346 Air receiviers 20,163 21,776 22,864 24,008 25,208 26,468 Propane Cylinders 34,734 38,902 42,792 46,216 48,527 50,953 Forklift 10,871 11,415 11,985 12,585 13,214 13,875 Fire Suppressent 3,528 3,881 4,191 4,527 4,889 5,133 Chemical Cylinders 6,567 6,895 7,240 7,602 7,982 8,381 Railcar 4,001 4,081 4,163 4,246 4,331 4,418 Water Heaters 2,313 2,891 3,614 4,156 4,779 5,257 Other 4,049 4,130 4,213 4,297 4,383 4,471
138,894 152,625 165,332 177,157 187,655 198,109
Historical Projected
International Sales 1995 1996 1997 1998 1999 2000
2,835 5,102 8,929 15,626 25,001 40,002
Revenue Growth-‐ Manchester Tank 10% 8% 7% 6% 6%
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Table 4
Another key to our strategy is implementation of the MRP II system. Management has seen cost savings, improved efficiencies and improved customer service by adding the system to the Elkhart plant. We feel that is the system is implemented across the company we will see improved margins and reduced SG&A expenses. We have assumed the MRP II system to be fully functional by the end of year 2. From there we are projecting an increase in the gross margins and reduced SG&A in years 3-‐5. Here are the assumptions we are using to project the financials based on our strategy:
Growth rate1996 1997 1998 1999 2000
RV Cylinders 5% 5% 5% 5% 3%Gas Grill 15% 12% 10% 8% 8%Mass Merchandising 8% 7% 5% 5% 5%Air receiviers 8% 5% 5% 5% 5%Propane Cylinders 12% 10% 8% 5% 5%Forklift 5% 5% 5% 5% 5%Fire Suppressent 10% 8% 8% 8% 5%Chemical Cylinders 5% 5% 5% 5% 5%Railcar 2% 2% 2% 2% 2%Water Heaters 25% 25% 15% 15% 10%Other 2% 2% 2% 2% 2%International 80% 75% 75% 60% 60%
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Table 5
Table 6 (In Thousands $000)
Model AssumptionsHistorical Projected
Gross Margin % 20% 20% 20% 22% 24% 24%Operating Expenses as a % of sales 10% 11% 11% 11% 11% 10%Additional Sales reps 800 800 800 800 800 SVP of Corporate Strategy salary 150 150 150 150 150 MRP II System 200 200 -‐ -‐ -‐ Annual CAPEX 2,000 2,000 2,000 2,000 2,000 Federal Income tax rate 35.00% 35.00% 35.00% 35.00% 35.00% 35.00%Depreciation as a % of sales 2.61% 2.61% 2.61% 2.61% 2.61% 2.61%
Historical Projected1995 1996 1997 1998 1999 2000
Domestic Sales 138,894$ 152,625$ 165,332$ 177,157$ 187,655$ 198,109$ International 2,835 5,102 8,929 15,626 25,001 40,002 Total Revenue 141,729 157,727 174,261 192,783 212,656 238,111 Cost of Goods Sold 113,383 126,182 139,409 150,370 161,619 180,964
Gross Margin 28,346 31,545 34,852 42,412 51,037 57,147 Operating Expenses 14,303 16,867 18,536 20,405 22,411 24,980 Operating Income 14,043 14,678 16,316 22,007 28,627 32,167 Other (income) expensesInterest 1,369 4,480 4,529 4,496 4,457 4,410 Depreciation and Amortization 3,704 4,122 4,554 5,038 5,557 6,223 Net Income before Taxes 8,970 6,076 7,233 12,473 18,613 21,535 Taxes 2,127 2,532 4,366 6,514 7,537 Net income 8,970 3,949 4,702 8,108 12,098 13,997 Depreciation and Amortization 3,704 4,122 4,554 5,038 5,557 6,223 Interest 1,369 4,480 4,529 4,496 4,457 4,410 EBITDA 14,043 12,551 13,785 17,641 22,112 24,630 Less: Tax adjustment (3,140) (1,382) (1,646) (2,838) (4,234) (4,899) Less:CapEx (2,200) (2,200) (2,000) (2,000) (2,000) Change in working capitalFree Cash Flow 10,903$ 8,969$ 9,939$ 12,804$ 15,878$ 17,731$
Terminal Value 107,428
Free Cash Flow 8,969$ 9,939$ 12,804$ 15,878$ 125,159$ WACC 20%NPV $79,742DCF Value at 51% $40,668
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III. Financing 1. Cost of Capital-‐ We are using a weighted average cost of capital of 20%. This is the cost of
capital for our financing of the $43 million purchase price. This is composed of $15 million in equity, $21 million on the revolver, and a $7 million mezzanine loan. The revolver is at $35 million because there is currently $14 million outstanding already. Our financing of the $43 million purchase price plus the $14 million in revolver is the total financing needed to be tested in our cash flow projections. Table 7
2. Asset Based Loan-‐ The Company currently holds a revolver loan that Manchester Tank can borrow against the receivables, inventory, and property plant and equipment. Based on the 1995 balance sheet, we have calculated that the loan ceiling for the revolver is about $43,000,000. The current revolver is about $14,000,000 and we are looking to borrow an additional $21,000,000 against the line of credit. Included in the revolver is a $2,000,000 cushion for any CAPEX or working capital needs. This would bring the total revolver to about $35 million. We are using a 10% interest rate for the ABL coming to $3,500,000 in annual interest. Here is the breakout for the Asset Based loan:
Table 8
3. Mezzanine Loan-‐ The Mezzanine loan will be for $7,000 at 14% interest. The interest will be 9% cash and 5% PIK interest. The principal will begin amortization in year 2 and carry on for 7 years. The following is the amortization schedule for the Mezzanine loan:
WACC
Equity 15,000 26.3% 35% 9.21%
Seller Financing (earnout) -‐ 0.0% 0% 0.00%
Revolver 35,000 61.4% 10% 6.14%
Cash flow loan -‐ 0.0% 10% 0.00%
Mezzanine 7,000.00 12.3% 15% 1.84%
Total Financing 57,000.00$ 100% WACC 17%
All numbers in $000sAsset Based Loan (ABL)
A/R 21,145 @ 80% 16,916$
Inventory 15,734 @ 50% 7,509
PP&E 38,044@ 50% 18,446
Total Financing 42,871$
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Table 9
4. Coverage Test-‐ We calculate that we can meet 2:1 coverage ratio all five years using this financing scheme. The following is our coverage ratio test:
Table 10
IV. Terms and Conditions
1. Each party shall bear its own costs relating to the Proposed Transactions. All sales tax payable as a result of the consummation of the Proposed Transactions shall be paid by Purchaser.
2. The Parties acknowledge and agree that the existence of their negotiations relating to the Proposed Transactions, and the terms and conditions thereof, are highly confidential in nature. Accordingly, neither Party shall, without the express written permission of the other Party, disclose to any person or entity (other than such Party’s legal counsel and/or accountants) any information regarding the Proposed Transactions, including the existence
Loan Amount 7,000.00 Cash 9%PIK Interest 5%Term (Years) 7
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7Balance 7,350 7,114 6,833 6,500 6,102 5,629 Payment $1,391 1,632 1,632 1,632 1,632 1,632 1,632 Cash 630 662 640 615 585 549 507 PIK Interest 350 368 356 342 325 305 281 Principal $0 603 636 676 722 778 844
1996 1997 1998 1999 2000ABL 3,500 3,500 3,500 3,500 3,500 Mezz Interest 630 662 640 615 585 Mezz Principal - 603 636 676 722
4,130$ 4,765$ 4,777$ 4,791$ 4,807$
5 Year Coverage Test 1996 1997 1998 1999 2000
Free Cash Flow 8,969 9,939 12,804 15,878 17,731
Cashflow available for P and I 4,485 4,970 6,402 7,939 8,865
Cashflow used for P and I 4,130 4,765 4,777 4,791 4,807
Ratio Covered ? Yes Yes Yes Yes Yes
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of this letter or its terms and conditions, or any other terms, conditions, or matters relating thereto.
3. Purchaser will conduct a financial and legal due diligence investigation of Seller’s business. This investigation may include, but may not be limited to, sales volumes, customer counts, operating expenses, profit margins, and other such matters as Purchaser, in its sole and absolute discretion, deems necessary. To facilitate this due diligence investigation, the Seller will allow Purchaser and its representatives such reasonable access as Purchased and its representatives may require during normal business hours to Seller’s facilities, personnel, books, and records. Our Due Diligence team expects the process to take no longer than 30 days. If our bid is accepted we will begin immediately.
4. The buyer is requesting exclusivity on the deal through Due Diligence 5. The Buyer will have control of all documents through the bid process. 6. Management will work with the investor group to help transition the business as the
brothers
V. Negotiations
Must win Nice to win Controlling Stake of 51% Exclusivity to the deal
Control of the documentation 60 days to complete DD First right to buy the 49%
VI. Communications Plan/ Day One Set of Actions
1. Communication with Senior Management-‐ Our investor group will meet with all senior management members to discuss the outcome of the transaction and how it affects them Our investor group wants to relay the message that although we are making changes to the strategy of the Company, we want to work with all senior management members. We hope to keep them as part of the team due to their extensive experience and track record in helping to get Manchester Tank to level it has reached. We also want to address the role of the SVP of Corporate Strategy. We want to relay that he is there to spearhead the new international growth effort along with implementation of the MRP system. He will be senior to the other management, but is looking to work with current management. In 2-‐3 years as the brothers are ready to move on he will be trained and ready for the role of CEO. Getting senior management comfortable working with the new SVP will be critical.
2. Communication to the employees-‐ We want to inform all employees that although there are new owners with the brothers, corporate culture will not change. All employees will be presented with the Company’s new strategy for growth and improvement. We wish to align the entire company with our vision so that everyone is excited and comfortable with the transition.
3. Communications with the Bank-‐ As noted in our financing section, we are looking to draw additional cash from the line of credit. We will still be far below the line of credit limit based on the above calculations.
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4. Communications with customer/ suppliers-‐ We do not see a need to inform the customers and suppliers of the transaction initially. As the brothers are ready to transition out of the business, then we can inform our customers that there will be a transition in management. The brothers will help transition those relationships to the new SVP.
VI. Due Diligence
1. Detailed P&L statement showing the chart of accounts for each income and expense category. We would like to see this report for the past 3 years. Our due diligence team will also need access to the company’s accounting software to get an understanding of how transactions are recorded and what controls are currently in place
2. Visit each manufacturing and distribution facility a. We want to get an understanding of how operations are done on a day to day basis.
Because we are in the same field, we want to see if there is any room for operation efficiency improvement.
b. We want access to the company’s time entry system to measure employee production. The reports we will specifically look at are job costing reports showing employee hours spent on a particular product and their billing rates. We also want a bill of materials showing what raw materials must be added to each finished good.
c. Detailed overhead report showing how the company allocates overhead expenses to finished goods.
d. Customer complaint reports to see if any customers are unhappy with the product’s quality.
3. Interviews with all senior management members a. We want to see payroll reports detailing senior management salary, bonus, and
Benefits. b. All performance reviews for senior management from peers and other employees c. Questions we wish to specifically address are: What are your intentions for the
company’s future? Are you interested in working with our investor group? How long do you plan to stay with the company?
4. Legal Due Diligence a. Discuss the company’s current law firm the status out any outstanding lawsuits. b. We want to see certification showing that every manufacturing facility is
environmentally compliant for the past three years. c. Discussions with the human resource department to look for any employee
harassment claims.
5. Inventory and accounts receivable valuation a. For accounts receivable valuation we would like to see all subsequent cash receipts
received after yearend to confirm that the customers are paying in a timely manner. b. To properly value the inventory we will sample the raw materials and examine the
most recent purchases to ensure that the inventory is valued at LCM. As stated above by checking the time and rate employees are charging to each finished good. We will also look at the overhead expense schedule to ensure the costs are being properly allocated based on labor hours.
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