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Wayzata Investment Partners’ pursuit of metal castors Neenah, Grede and Elyria foundries could lead to a synergistic tie-up that eventually melds the three companies together, an industry source, a legal source, three buysiders and two sellside sources told Debtwire.
The Minnesota-based hedge fund was named the stalking horse bidder for the bankrupt Grede Foundries last week, and is also amassing fulcrum positions in the debt of distressed competitors Neenah Foundry and Elyria Foundry, said the sources.
Should the three-pronged investment strategy culminate in Wayzata acquiring Grede and then equitizing its Neenah and Elyria holdings, the stage could be set for a series of stock mergers or JV deals that combine the assets, the sources added.
Such a collective could benefit from selling, general and administrative expenses, production cost savings as well as an expanded geographic reach, said the sources. The collective could also give Wayzata a springboard to an eventual IPO or dividends, said the sellside sources and two of the buysiders.
Messages left with officials at Wayzata, Neenah, Grede and Elyria officials were not returned.
While Wayzata is known for taking loans to own positions in the restructurings of same sector industrial companies – Tembec and Caraustar in forest products; Portola Packaging, Propex and Key Plastics in packaging – the Grede, Elyria and Neenah investments are unique because the companies’ raw material needs and end-markets overlap.
Grede and Neenah are both 13% margin, high volume operations that source steel scrap for gray iron castings used in auto parts and industrial machinery. While both are headquartered in Wisconsin, Grede’s operations are more concentrated in the Midwest, while Neenah has a presence in the mid- Atlantic region and California.
The smaller Elyria also produces gray iron castings, with one plant in Ohio and a second in Greenville, Pennsylvania, just 15 miles from a 130,000 square foot office and manufacturing plant owned by Neenah. Elyria’s business is comparatively more specialized with higher 21% margins, producing larger scale castings for the auto and power generating sectors.
If combined, the triumvirate could generate USD 180m-USD 210m of mid-cycle pro forma EBITDA per year based on USD 1.2bn-USD 1.4bn of revenue and 15% margins, said one of the sellsiders and one of the buysiders. Assuming a 4.5x industry multiple yields a hypothetical USD 880m enterprise value, added the buysider and sellsider.
Waiting is the hardest part
While a roll up of all three companies could produce a sizeable competitor, if Wayzata were to pursue such a strategy, it would require a patient approach.
The Silverhawk Capital Partners-owned Elyria is projected to battle a cash crunch over the next year and could trip a leverage covenant in its 3.8x levered USD 100m 13% second lien notes due 2013, according to a Standard & Poor’s report from September. The notes are majority owned by Wayzata and are primed by a USD 15m revolver and USD 10m term loan, said one of the buysiders and the legal source.
Messages left with officials at Silverhawk were not returned.
Meanwhile, Neenah is running into liquidity and covenant hurdles of its own. The company disclosed on 2 July that is was in violation of a 1x fixed charge and 2x interest coverage covenant. Moreover, the company reported having no cash, and less than USD 15m of availability on its USD 110m Bank of America-led revolver at the time, as reported.
Wayzata owns a majority chunk of Neenah’s USD 225m 9.5% senior secured notes, said two of the buysiders and the legal source. The notes last traded at 50.5 on 4 November, up from 38 on 10 September, according to MarketAxess.
Using the 4.5x industry multiple and a USD 55m mid-cycle EBITDA run-rate implies a USD 250m enterprise value for Neenah, said one of the sellside analysts. That would make the 9.5% notes the fulcrum in a workout, worth around 60 beneath a fully tapped revolver, he added.
Of the three situations, Grede’s sale through the Bankruptcy Court for the Western District of Wisconsin is the most immediate. Wayzata’s stalking horse status was awarded last week after the fund swooped in post-petition and bought out the DIP and pre-petition second lien positions of DDJ Capital. The Wayzata offer is valued at USD 105m, and includes a USD 40m credit bid from the debt it bought from DDJ.
Competing bids are due by 2 December, with an auction set for 9 December.
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