Turmoil In The Fire Apparatus Industry

LightRock takes a look at:

Turmoil In The Fire Apparatus Industry

Turmoil in the fire apparatus industry is nothing new. Over the years, many old-line nameplates have fallen by the wayside. Pirsch, Maxim, Young, Mack, FMC and Grumman are but a few of the names that have faded from the scene over the last 20 or so years. More recently, we have seen a number of smaller manufacturers crash and burn. Examples include New Lexington, a manufacturer based in Pennsylvania and Elite, based in Tilleda, WI. New Lexington and Elite both went down ugly with New Lexington leaving several volley departments holding the bag after they made advance payments (without the protection of, for example, a performance bond) to the company for work that wound up never being performed. Elite failed to perform on a nearly 40 truck order for Montgomery County, MD.

Now it seems that the turmoil has spread to some larger, or at least better known, manufacturers.

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In 2003, Seagrave was purchased by a private equity company called Ballamor. Mr. Jim Hebe, ex CEO of Freightliner and the man who resurrected the American LaFrance brand, was installed as CEO. He lasted about 18 months and then was, in effect, asked to leave his own company. Seagrave then installed a new CEO with prior experience in the bus industry to run the company. He lasted about the same length of time. Then, about a month ago he, along with Seagrave’s Chief Financial Officer and Sales/Marketing VP all departed abruptly. The private equity company that currently owns Seagrave, ELB Capital Management, then installed some current Seagrave employees into the top slots on an interim basis. ELB is a spin-off of Balamor and their site can be found HERE.  Industry sources say that ELB is now evaluating what their next moves might be.

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After being resurrected in the mid-1990’s by the aforementioned Mr. Hebe, American LaFrance operated unsuccessfully under Freightliner ownership for a little over 10 years. Frustrated by about $400 million in losses over that time, Freightliner’s German parent company, what was then called Daimler-Chrysler, sold ALF to a private equity company called Patriarch Partners in 2006. Patriarch’s forte is dealing with “distressed companies.” That is a polite way of saying, “companies that aren’t making any money.” After hastily building a new factory near Charleston, South Carolina the company announced last week that over 100 employees were being furloughed for a month as others tried to figure out exactly which end was up. Merry Christmas.

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Because they are owned by a publicly traded company (Federal Signal) and their former leading position in the fire apparatus industry, Emergency One’s travails have been the most widely reported. E-One hasn’t been making money for some time and current projections are that they’ll lose about $12 million in 2007…that’s about a cool million a month. Investors and analysts have been clamoring for change and last week they got it with the abrupt resignation of Federal Signal’s CEO, Robert Welding. About 2 days later, as reported in the Ocala Star-Banner newspaper, a New York based investment company, Ramius Capital Group, had acquired a 7.5% stake in Federal Signal, a large enough slice to give them significant say-so in the future of the company. According to their website, “Ramius’ investment strategies are designed to address both institutional and high-net-worth individuals’ needs to preserve and grow allocated capital on an absolute basis.” Read: Turn things around and make money. Period.

One common thread with the current ownership of all three of these apparatus manufacturers is the involvement, to one extent or another, of private equity companies. In order to get a better feel of what is going on with these manufacturers, one needs to understand what a private equity company is. In basic terms, a private equity company is typically formed to take money from affluent private individual investors and to then purchase, in whole or in part, companies that make something or provide some service. Notice the use of the word investors. The people who put money into private equity expect a return on the funds they’ve invested. Say, for example, an investor kicks-in $1 million. He or she would expect to see more than that back either as profit from the ongoing operations of the companies that have been acquired or when the company is resold. How much should the investor see back? Let’s put it this way, someone with $1 million to invest can make a nice return with little or no risk. When they invest in private equity, they expect significant returns, in exchange for the risk they’ve taken on. In the case of all 3 of these companies, it is clear that, at least in terms of ongoing operations, this simply is not happening.

So, if the private equity company isn’t providing a return to the investors through the ongoing operations of the companies they’ve purchased, what’s the next potential move? Sell the company, in whole or in part, or in pieces. Of course, in order to make this work from the investor’s perspective, the sale(s) would have to result in a return of all the money invested up to that point plus some reasonable profit. Let’s go back to our investor who chipped in $1 million, say 4 years ago. Assuming that he or she hadn’t been asked for any additional money to cover operating losses at the acquired company and his or her expectation was a 15% annual return on the funds invested, the investor would be looking for upwards of $1.75 million back at the end of 4 years. Even if the investor was willing to accept a very low return, say 5% annually, he or she would still be looking for about $1.22 million. What does all this mean? In order to even minimally satisfy the private equity investors, the sale price would have to be 25% higher than what the company was acquired for 4 years ago. I think given the current performance of the companies we’ve discussed, along with the current state of the fire apparatus market in general, that generating this type of return would be…problematic.

From my seat, it looks like 2008 could be very eventful year in the fire apparatus business. Several apparatus manufacturers are at a financial crossroads. By the time FDIC rolls around it will be interesting to see who’s around and who owns whom.