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A shareholder disagreement concerning a modern, warehouse logistics business in Hamilton.

Black Arrow

the situation

A shareholder disagreement concerning a modern, warehouse logistics business in Hamilton. We had been originally approached by one of the partners but we were not convinced that he could operate the business if we backed him.

Several weeks later we were introduced to the partner running the operation and after due diligence we supported his pulling the shotgun clause in the shareholders agreement at a fair price.

After all was said and done The Shotgun Fund ended up as a 50/50 partner with the operator. We set about hiring a new CFO, reviewed strategy and augmented the board with an independent industry director.

Industry Background: The business was in automated storage of high value steel products such as steel coils for the automotive industry. 

The company had recently completed construction of a 180,000 square foot Class 1 (Automotive class) facility on the CPR lands in Hamilton which was a nexus for steel logistics in Canada. The company’s clients included the CPR, Stelco US Steel, Dofasco (Ancelor), Samuel Steel and Algoma Steel. It was and remains today the largest, most modern, steel transfer facility in Canada. The company added strategic assets over the next several years while the economy grew.

At the same time, the steel business was undergoing global consolidation. Local service storage and logistics providers were closing their doors as supply chains were changed or disrupted. Steelcare’s founder, our partner, was able to move quickly enough to keep the company profitable while revenues were falling. In addition, the company had been developing a software system around its warehouse optimization and automation know-how.

After the warehousing business recovered from the recession, the Fund and management embarked on a board sponsored mandate of optimizing shareholder value.

When all but one division was sold, the Fund sold our management partner the remaining interest in the warehouse automation business, which has become a successful stand-alone entity.

The Inflection Point: The inflection point for this business was the combined effect of the global recession and the global consolidation of the steel industry.

This motivated management and the board to monetize the company’s operations as going concerns while providing acceptable returns to investors. This was done through divestitures to strategic buyers with long term perspective.

the investment

The Investment was held for 12 years and provided a 2.8x return on capital for the Fund's investors despite challenging industry conditions. 

  • Every business regardless of its nature must invest in technology
  • Not every business has the ability to be a 10 timer but if the hard decisions are made you can get an adequate return
  • Every business is cyclical
  • Continuous improvement is not a platitude, its necessary
  • Strong customer relationships are a moat against a downturn
  • Strong alignment with the owner-manager and senior management team helped insulate the company during a significant downturn against a loss in value
Logistik logo

Government diplomat sees an opportunity to provide crown corporations with a “managed service” uniform fulfillment program…

Black Arrow

the situation

Government diplomat sees an opportunity to service crown corporations with uniform requirements. Partners up with 2 other individuals that manufacture pants and shirts. Over several years the company sees significant growth through winning government contracts, including the Department of National Defense and the Post office. Unfortunately, after all the success, the pants and shirt partners decide to take the company from the entrepreneur by triggering a shotgun clause. The first shotgun was a low ball, the Shotgun Fund responded and worked through Boxing Day and New Years to buy out the low ball shotgun offer, once cleared, the other partner pulled the trigger at a much higher price, again the Fund responded and became 50/50 partners with the entrepreneur.
We made a valuable acquisition of a look alike company in Australia with a local partner in a joint venture arrangement. By this time the original entrepreneur had become a management challenge so we levelled that out by selling a third of the firm to another larger PE fund. We set about right sizing the business, selling or closing marginal operations and also bought out our Australian partner. The three owners agreed that filling out the balance of the management team with strong and financially motivated A players would bring results and prep the company to be sold. The life of the investment was 18 years.

the investment

  • This was already a profitable, non-capital-intensive business, it fit our Momentum Criteria.
  • The owner manager was motivated to move quickly, but was not experienced in acquisitions, thus we needed to be more involved at this level.
  • Joint venture arrangements like all partnerships have their special issues, prepare for them in advance
  • It was critical to keep the company tied to strategy and manage alignment between shareholders the entrepreneur and the rest of the management team.
  • The selling process was carefully managed to optimize value for the all stakeholders.
  • You may not know in advance when a particular investment will hit it’s inflection point for value, therefore investment time horizons must be flexible.
Etratech: A Gentherm Company logo

This shotgun situation was the first transaction, in September 2000, in Shotgun Fund I, we helped the operating partner buy out his 50% co-founder…

Black Arrow

the situation

This shotgun situation was the first transaction, in September 2000, in Shotgun Fund I, we helped the operating partner buy out his 50% co-founder. The co-founder triggered the buy-sell clause the day that the operating partner was supposed to leave on his summer vacation.

The Shotgun Fund was able to respond quickly and opportunistically to a low-ball offer that had a quick turnaround requirement. It was tailor made for The Shotgun Fund as the operating partner actually wanted a new shareholder to add value at the Board level and assist with growth initiatives. Within 48 hours of our first meeting, The Shotgun Fund issued a Commitment Letter, and we advanced funding and closed the transaction 33 business days later.

The first investment decision driver related to the business fundamentals.  It did not need material capital expenditures to grow, it had a culture of profitability and a solid foundation to build on. The second investment decision driver related to the operating partner, who owned more equity than we did, so our interests were aligned from the start, and he wanted a new shareholder partner to become active at the board level to assist with evaluating strategic growth initiatives.

the investment

Rationale: Strong operator running a solidly profitable company with revenues of $18 million that didn’t require material capital spending to grow, and had a culture of profitability. In addition, interests were aligned from the start with the operating partner, he owned more equity than the fund and wanted a new shareholder partner to become an active financial partner to assist with strategy, growth and building a team. We recognized a kindred spirit who wanted to work together to build value.

Accomplishments: Between 2005 and 2007 Etratech acquired and successfully integrated a complementary electronics components business in China. Quality certifications were obtained in the following years. The engineering team consistently solved customer problems leading to the successful introduction of new products into new markets. The success of the partnership was based on working with the team to prioritize their ideas and bring structure and discipline to the action plans.