Signature Group to Mimic Private Equity Format
By Tatiana Kulkarni
Following its recently announced $525 million acquisition of Aleris Corp.’s aluminum recycling business, Signature Group Holdings Inc. (SGGH) looks to pursue the model of a publicly traded private equity firm.
“While remaining flexible, one outcome would be to become a mini-mini Berkshire Hathaway,” said CEO Craig Bouchard, referring to Warrant Buffett’s PE-like Berkshire Hathaway Inc. (BRK.A) of Omaha.
The pending acquisition of the Global Recycling and Specification Alloys business of Cleveland’s Aleris is a step in that direction, Bouchard said.
“It’s not [Signature’s] first acquisition but by far the largest,” said the CEO, who co-wrote the New York Times bestseller “The Caterpillar Way: Lessons in Leadership, Growth and Shareholder Value.”
As for making further add-ons to the aluminum recycling platform, Bouchard said integrating the target is the focus for the next six to 12 months, “but in the future, bolt-ons will certainly be part of our growth strategy for this business.”
On Oct. 17, the Sherman Oaks, Calif., company announced it would pay a transaction multiple of 6.5 times the unit’s Ebitda. The companies plan to close the deal in the next few months, pending regulatory approval and certain other conditions.
For the fiscal year ended June 30, Global Recycling and Specification Alloys had Ebitda of $75 million.
Signature won the division through an auction process by outbidding a number of PE firms, according to a source who requested to remain anonymous. Aleris had put the division up on the block earlier this year, the source said, but would not specify an actual date.
Names of the firms in the running were not divulged.
Signature has its roots in mortgage lender Fremont General Corp., which filed for Chapter 11 on June 18, 2008, in Santa Ana, Calif. Distressed-debt investor Signature Group Holdings LLC won a battle to sponsor the debtor’s reorganization plan, and it emerged from bankruptcy on June 11, 2010, as Signature Group Holdings Inc. (Securities and Exchange Commission filings do not indicate the LLC’s current stake, if any, in Signature, but the LLC hold certain warrants for common shares, according to the Form 10-K filed on March 14.)
Bouchard was named to the company’s board and became CEO on June 4, 2013, after Charlestown Capital Advisors LLC launched a proxy war against existing management, including its then-CEO Chris Colville, according to a filing with the SEC. Bouchard’s appointment was part of a settlement with Charlestown.
Although Bouchard described Signature’s investment focus as agnostic, he said transportation, food, water, and energy are sectors of interest. Signature hopes to “make one major acquisition a year,” he said. It acquired circuit breaker distributor North American Breaker Co. for roughly $30.5 million on July 29, 2011.
The company can make use of nearly $900 million in net operating losses largely inherited from Fremont General for deals, “as well as support from Wall street,” Bouchard said.
While he declined to name any specific targets under review, he said there are certain characteristics he looks for when choosing a target.
“There is a formula – really great management, a market dynamic with growth, sustainable competitive advantage and a great customer base,” he said, adding, “We do not want to turn around companies.”
On the transaction with Aleris, Deutsche Bank Securities Inc. was financial adviser to Signature, and Crowell & Moring LLP, provided legal advice.
Credit Suisse and KeyBanc Capital Markets Inc. provided financial advice to Aleris, while Fried, Frank, Harris, Shriver & Jacobson LLP acted as legal adviser.
Signature shares, traded over the counter, closed Monday at $10.20, up 4.62%, giving the company a market capitalization of $125 million. The shares jumped from $7.65 to $9.80 following news of the Aleris deal.
Aleris is backed by private equity firms Oatree Capital Group LLC, Apollo Global Management LLC and Sankaty Advisors LLC, which acquired control of the company during its bankruptcy case. Aleris, called Aleris International Inc. at the time, exited Chapter 11 on June 1, 2010, reorganized with the aid of $690 million rights offering and the issuance of common shares.
The company did not respond to multiple calls and e-mails.