Watermill - South Deerfield Industries

Division: Phoenix Management Services


Client

South Deerfield Industries ("SDI") is a developer, manufacturer and distributor whose primary distribution channels include consumer retailers and industrial distributors of power tool accessories. SDI has two main product lines sold into the consumer and industrial marketplaces and account for annual revenues in excess of $75 million. Drills, including drill bits and drill bit sets, are sold into the consumer markets and account of 30.7% of revenues or $23.0 million of gross sales for FY2005. Saws, including hole saws, reciprocating saw blades, jig saw blades, hacksaws, and band saw blades, are sold to both consumer and industrial markets and account for 69.3% of revenues or $52.0 million of gross sales in FY2005. Located in South Deerfield, Massachusetts, SDI is a wholly owned subsidiary of Kennametal Inc. As a publicly listed company (NYSE: KMT), Kennametal is engaged in the manufacturing and distribution of industrial cutting tools for the metalworking, mining, oil and gas, and construction markets. Kennametal is the market leader in North America and the second largest tooling company in Europe with annual revenue in excess of $2.3 billion. SDI is Kennametal's only consumer products and linear cutting tool (saw) business.

Problem

As Kennametal’s only consumer products and linear cutting tool (saw) business, SDI was no longer considered by Kennametal ‘s senior management to be part of the company’s long-term strategy for growing the industrial tooling solutions business. As such, both Kennametal and SDI believed that SDI’s growth and profit prospects would be greater under different ownership. Phoenix was engaged by the potential buyer, Watermill Ventures to conduct an extensive financial and operational due diligence of the Company to be relied upon by not only Watermill, as the potential buyer, but the senior lender, mezzanine lender and additional equity lender to finalize the purchase.

Solution

Phoenix Management Services prepared a written financial report that included the following: a review of SDI’s business plans and historical performance; evaluation and validation of SDI’s EBITDA add-backs; evaluation and vaildation of any and all financial forecasts; review and examine the quality of balance sheet items for possible inflation and unidentifed value for the purchaser; examine SDI’s exposure and relationship with their largest customer; examine the staffing and management resources and determine a transition plan for the purchaser; examine SDI’s WIP and potential for lending availability; access and examine the purchase contracts of raw materials; and evaluate and review the financial systems, controls and process. Due to the upfront due diligence preformed, the purchaser was able to make an informed decision about revising their purchase price for the business.