Potential Briggs & Stratton private equity buyer has history of investment

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Michael Nikolai was vice president of operations for Waupaca Foundry when the company was acquired by New York-based private equity firm KPS Capital Partners in 2012.

“The biggest thing KPS did for us was they started reinvesting in us,” said Nikolai, now president, chief operating and chief executive officer of Waupaca Foundry.

Waupaca’s business had started to rebound from an industry downturn in the early 2010s, but its parent company, ThyssenKrupp Budd Co., was over budget on a new steel mill in Alabama. In need of cash quickly, the company looked to sell Waupaca Foundry.

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The Wisconsin-based company had received less than $25 million in investment from ThyssenKrupp during the three prior years, according to Nikolai, so the new ownership under KPS was welcome.

“If you understand the foundry industry, we’re pretty capital intensive, so they had pretty much starved us prior to the sale,” Nikolai said. “KPS, they were pretty good to Waupaca, so they invested highly during that period of time which gave us a change of about 8% year-over-year in revenue.”

KPS sold Waupaca for $1.3 billion in cash to Japan-based Hitachi Metals by November 2014.

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While KPS’ ownership of Waupaca was relatively brief at a little more than two years, it is newly relevant in Wisconsin because one of the private equity firm’s latest acquisition targets is Wauwatosa-based Briggs & Stratton Corp.

“Briggs & Stratton enjoys a leading market position, scale, a global manufacturing footprint, world-class design and engineering capabilities, and a portfolio of industry-leading products sold under iconic brand names,” said Michael Psaros, co-founder and co-managing partner of KPS.

“We intend to capitalize on the company’s many attractive growth opportunities and to support its already substantial investment in research and development, technology and new product development. KPS intends to grow the new Briggs & Stratton aggressively through strategic acquisitions,” Psaros added.

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If KPS does end up buying Briggs, the small engine maker will join companies like TaylorMade Golf Co., Life Fitness and C&D Technologies in the private equity firm’s portfolio. KPS also agreed to acquire AM General, the South Bend, Indiana-based maker of the Humvee, just days after the Briggs deal was announced.

Briggs filed for Chapter 11 bankruptcy in mid-July after a series of financial and business challenges limited its ability to continue operating without new financing. KPS offered $265 million in financing while the company’s existing lenders provided another $412.5 million as part of a debtor-in-possession package.

KPS also agreed to acquire Briggs for $550 million in cash as part of the deal and is slated to be the stalking-horse bidder in a court-supervised sale process currently planned for September. Attorneys for Briggs told the court in early August they have received interest from several other interested parties as well.

Briggs faced $195 million in notes due in December, putting pressure on the company to address its debt and liquidity situation this year. In March, the company said it would seek to sell most of its products business to focus on making small engines and expanding into commercial battery technology.

The proceeds of that sale were expected to pay the notes, but the company also said it would pursue other capital options.

Timing, however, was not on the company’s side. Briggs announced its plans on March 6, just as the COVID-19 pandemic was about to escalate from a supply chain challenge to the catalyst for an economic shutdown. Initial interest in the products business dried up and capital markets became difficult for Briggs to access.

Briggs also faced a springing maturity in its credit facilities if the notes were still outstanding in September.

As the company sought to find new financing to pay off the notes, its lenders gave Briggs first a June 15 and then July 15 and July 19 deadlines to find new capital in exchange for relaxing some financial covenants.

Briggs’ advisors reached out to more than 100 potential investors to find new capital and eventually received eight proposals, all of which called for a Chapter 11 bankruptcy process. Five of the proposals called for debtor-in-possession financing and a change of control of the company, two called for just DIP financing and one called for just a change of control.

As the company began working with JPMorgan Chase on a DIP financing package, KPS emerged offering to fund a portion of it.

The proposed deal would likely leave enough money to cover Briggs’ existing debt and leave little recovery for unsecured creditors. The deal does not change pension benefits for retired Briggs employees, but it does eliminate health and life insurance for retirees. Around 450 former employees had health insurance through the company and another 4,000 had life insurance. Nearly 250 current employees would have been eligible for those benefits.

Around $50 million of those benefits was unfunded, according to Briggs.

KPS was able to reach a deal in principle with the United Steelworkers, which had gone since 2017 without a new contract for around 520 Milwaukee-area employees. Talks between the two sides ended in 2018.

“KPS brings experience and a long-term business plan geared toward keeping our plant viable and employment secure,” Tom Conway, USW International president, said in a press release.

KPS touts its positive relationships with unions as part of its investment strategy.

“Central to KPS’ approach is the creation of participatory, communicative and empowered corporate cultures that encourage direct employee engagement in making businesses better, safer and more rewarding,” the company’s website says.

In a 2014 Pittsburgh Post-Gazette profile, Psaros traced his approach to employees buying the Pennsylvania steel mill his father worked for in the 1980s. He’d later go on to work for the investment banker that engineered the deal before co-founding KPS.

“In most situations, capital and labor are anathema to one another. We see the power in capital and labor working together with one another,” Psaros told the Post-Gazette.

Waupaca Foundry did not have a union environment when KPS owned it, but Nikolai said the firm did keep previous wages, bonus programs, health care and profit sharing in place as long as it was supported by earnings.

“The difference between the Briggs acquisition and Waupaca was we were a stable, improving company,” Nikolai said. “With Briggs exiting Chapter 11, there may be more restructuring that KPS would do.”

He added that to him KPS is unique among private equity firms for the size of its operations group.

“That’s one of the things that they really try to hang their hat on is that they improve operations in all the companies they own,” Nikolai said. “They will bring investment and other cash to the game if you can justify the investment, so if Briggs does have a clear investment picture that can grow the company, they probably have a really good buyer.”

Overall, Nikolai said KPS had limited and focused interaction with Waupaca during its ownership. He had a contact in operations, the CEO had a contact person and another individual worked with the finance department. Nikolai was also asked to support production systems at other portfolio companies.

“They were more aggressive with underperforming companies, but that’s to be expected. They know what they want and if you weren’t cooperative it did sometimes cause some management heartburn,” he said.

Nikolai added that KPS was prompt with feedback.

“When you pitched an investment idea, you gave it to one person and in a couple days they would give you an answer,” he said.

It will take a little longer to find out if KPS is indeed the next owner of Briggs. The auction is tentatively set for September with a closing in November or at least by the end of the year. Lawyers for Briggs said they hoped the auction would generate a robust bidding process.

On the other hand, attorneys for the group holding some of the $195 million notes hinted at potential objections to the process during an initial bankruptcy hearing. Attorney Robert Stark suggested a sale may not maximize the value of the company and with temporary financing in place Briggs and its stakeholders have a chance to evaluate alternatives.

Stark also noted that having KPS, with a union agreement, as the stalking horse and financer does not create a welcoming environment for other bidders.

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