MPI is a leading manufacturer of high-precision “fine blanked” automotive and industrial parts for powertrain, hydraulic and other safety-critical applications, including the largest market share of fine blanked transmission components for the North American automobile industry.
MPI’s parent company was over-leveraged, facing bankruptcy and under increasing pressure from its creditors to sell profitable assets like MPI. Given the parent company’s dire financial situation, MPI’s leading customers (e.g., Ford, Chrysler and General Motors) were becoming wary of committing to long-term future orders with MPI, and the business was in danger of losing its status as a preferred supplier.
Monomoy was introduced to MPI by a middle-market intermediary, and eventually acquired the company in 2012 after a failed auction. To close the transaction, Monomoy had to complete due diligence, structure a complex purchase transaction, renegotiate contracts with MPIs leading automotive customers and place new financing -- all before the banks foreclosed on MPI’s parent company. Despite these complexities, Monomoy completed all negotiations and closed a cash purchase of MPI within 30 days.
The Investment Thesis
Monomoy’s Four Key Questions
- Does the business have a reason to exist?
- Does the business have problems we can understand and fix?
- Can we grow the business?
- Can we generate an acceptable return?
MPI passed all four of Monomoy’s key investment questions (see sidebar) with flying colors. MPI’s automotive customers, in particular, were anxious to stick with MPI and avoid the risk and expense of qualifying new suppliers for their safety-critical parts. We had good reason to think that improved production, sourcing and pricing could immediately and significantly improve MPI’s overall profitability. And the continued growth in auto and light truck sales, combined with the introduction of ever-more complex 8-, 9-, and 10-speed automotive transmissions, led us to conclude that MPI could be a strong, growing business for many years to come.
We began the transformation of MPI by putting a new management structure in place to work alongside Monomoy operating professionals under the Monomoy Production System to implement a disciplined value creation plan. We initially focused on generating cash by consolidating vendors, extending vendor payments, improving customer collections and repricing low margin products. Within months, MPI was generating enough cash from working capital to pay down debt and support a dividend for its shareholders. The implementation of lean manufacturing and a consolidation from three to two manufacturing facilities created additional efficiencies and cost savings. Together, these initiatives allowed MPI to deleverage rapidly and positioned the company to secure additional business from existing and new customers, command higher prices, and negotiate better terms with both suppliers and customers.
In the first half of 2014, MPI secured new programs in both the automotive and the industrial sectors, filling out a growing order book for 2016 and 2017. MPI had become profitable, diversified and poised for significant growth. In July of 2014, we completed the sale of MPI to a new private equity owner for a gross return of 3.2x on our investment and a gross IRR of 172% during Monomoy ownership. Monomoy’s investors did well by the MPI investment. As our partners in the transaction and equity owners in the business, the MPI management team also made out very well in the sale of the company.