Deal completed in: 8 Months
Hornblower took on the assignment to sell Ertone Plastics Ltd in late 2019, presenting buyers with the opportunity to acquire a highly reputable plastics injection moulding manufacturer based in the South East of the UK. The company specialised in providing an established suite of products primarily for the airline catering industry and had successfully operated for over 30 years, demonstrating market expertise and resilience in a demanding and fast-changing sector.
Benefiting from a highly successful trading reputation and record, Ertone Plastics had reached a point of achieving consistent profitability, achieving high gross margins for the sector through a tightly controlled overhead base and lean infrastructure. As a result, the balance sheet was strong with no debt in the company.
The business enjoyed a robust, long-standing client base consisting of household names and prominent players within the airline industry. Key clients ranged from large, international airlines through to budget operators. The company had also nurtured a client base of ancillary businesses and suppliers to the travel and hospitality sectors.
As a specialist in providing a niche range of injection moulded polycarbonate catering equipment, the Company manufactured a range of products designed and developed to ensure durability, strength and heat-resistance to meet the high impact-demands of the airline industry. In addition, Ertone Plastics owned manufacturing tools specific to its product range which acted not only as a significant lever to ensure customer retention, but due to the cost of such tools (ranging from £60,000-£100,000 each) they also represented a significant barrier to entry to other competitors.
With lead generation wholly reliant on an organic approach, focused on direct contact from the existing customer base, this potential acquisition came to market with considerable scope for scalability and expansion.
Ertone Plastics operated with a lean and efficient team led by a Factory Manager controlling the day-to-day aspects of the business, supported by an Office Manager. The business founder and owner planned to exit the business having reached beyond retirement age without a successor for the business and was therefore committed to engaging with an acquirer to take the company forward and realise its growth potential.
By January 2020, the mandate had reached a favourable stage, with Hornblower securing an agreement with a potential acquirer for Ertone Plastics. However, upon considering the deal, the vendor decided not to accept the offer on the expectation of eventually attaining a higher price for the business.
As 2020 progressed, the picture changed dramatically with the onset of Covid-19 restrictions and resultant impact on the aerospace and airline sector. Following the imposition of the lockdown, the company experienced a significant downturn in business and was beset by serious vulnerabilities regarding its client base. As a direct result of the lockdown and the severe and immediate reduction in demand for airline travel, the company experienced a direct hit, with the consequences of the pandemic affecting 80% of its revenues.
With the deal no longer in place and the impact of Covid-19 continuing to take its toll on the aviation industry, after a few months of rationalising the impact of Covid-19 the owner of Ertone started to consider winding the business up as he was of an age where he didn’t want to commit to managing the unknown risks of Covid-19. The decision to wind up the business would have resulted in the owner getting no return for all his effort over the years and the loss of 23 employees deriving their livelihoods from this business.
Hornblower recognised the long term value in the company and was determined to support this business sale through exceptionally challenging circumstances. We began by urging the vendor to let us re-market the business, focusing on a select group of parties that had demonstrated serious interest in the business prior to the lockdown. This decision eventually resulted in an extremely fair deal being agreed with a buyer along with other companies with synergy within the plastics sector, as well as a total commitment to trade Ertone forward and re-build the company.
As an integral part of the agreement, the vendor was only required to commit to a 3-month handover period, sparing the vendor from the possibility of having to wind the company up, resulting in job losses and a likely period of 1-2 years for this option to fully play out.
Whilst this business being in the aerospace and airline sector was very much affected by the lockdown, the buyers have taken the long-term view that the airline customers demand will return. In order to effect this eventual return by clients, it was essential for the company to retain the tooling and moulds for the products they make.
Over the years, our longstanding record for achieving optimal deal values for our clients has afforded us with learning opportunities with each completed deal. From this particular deal, the following key learnings emerged:
Serious buyers with a long-term strategy and desire to trade in a certain sector will still offer fair deals.
Not all deals are defined by an earn-out or deferred structure, as proven in this case.
Valuations post Covid-19 are currently based on pre-Covid performance where the business has been affected. However only time will tell how long this approach will last and will depend on the longterm outlook for the company in question.
To paraphrase a famous saying; ‘beware of the unknown unknowns.’ The buyer had originally made a good offer in January which the vendor rejected in the hope of receiving a higher offer. Following the impact of the pandemic on the business, the eventual offer made a few months later was reduced by about 20%, which fortunately worked out as a good offer for the vendor in significantly different circumstances.
The deal was completed over a period of 8 months and the process was led throughout by our International M&A Director and Business Sales & Acquisitions Consultant Mark Sykes.
SOLD – August 2020
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