Arx reaps 4.5x on Ergis Eurofilms exit

The deal has awarded Arx with a 4.5x cash-on-cash multiple and an IRR of 33%.

Arx acquired a majority stake in Ergis Eurofilms in 2003, investing €7m to support the company's management buyout, according to unquote" data. The company was acquired from a number of financial investors, as well as the Polish State Treasury, which held onto a minority holding until 2004. The company had been privatised a more than a year before the Arx investment.

Since investing, Arx has supported the company in relocating and consolidating production sites, divesting non-core assets and performing three bolt-on acquisitions.

According to Jacek Korpala, co-managing partner of Arx (pictured), the buyout house had identified several key value drivers at the time of the acquisition. The first was to deleverage the business and ensure it was cash-generative. The second was to rationalise the company's production process. As Ergis was the result of several mergers it had been left with production overlaps in different locations. Arx helped the company consolidate its production lines into two main locations and sold off the sites that were no longer needed. These disposals generated extra cash for the company, which was reinvested into its new facilities. The new production sites enabled Ergis to expand into new lines of business.

Another part of the investment strategy was to refocus the business away from its original client base, which was the construction industry, and expand into the packaging sector. By 2006, Arx had supported Ergis in paying down all of its debt, and its production inefficacies had been resolved. It was at this point that Arx decided the best exit would be to list the company.

This required Ergis to develop a growth story in order to attract investors. Arx looked into the company's product portfolio and targeted three bolt-on companies that would give Ergis the necessary exposure to, or production know-how, to fill in product gaps. It acquired one company in Poland and two in Germany. The add-on companies enabled Ergis's to produce rigid films made of polyvinyl chloride (PVC) and polyethylene (PE), both of which are used as dominant packaging materials across Europe. As certain countries have a preference for either PVC or PE, it was crucial that Ergis be able to produce both to ensure it could serve a wide range of customers, Korpala explains. Ergis also expanded into laminated materials packaging for food, typically used for meat and fish.

In mid-2006, Ergis was listed on the Warsaw Stock Exchange. The issue saw Ergis introducing just less than 13 million ordinary shares to the exchange. Most recently, Arx sold down its remaining holding in the company to realise a full exit.

Company
Headquartered in Warsaw, Ergis specialises in plastics processing and manufacturing of PVC and PE. Its products include stretch films, PVC thermoshrink films, insulation and construction films, PVC compounds, PVC rigid films - both pharmaceutical and technical - BOPP films, artificial leathers, PVC-coated fabrics, food wraps and tablecloths. The company mainly sells into Central and Eastern Europe.

In 2012, the company reported revenues of PLN 633m, up from PLN 305m in 2006.

People
Tadeusz Nowicki is president of the management board and Marek Gorski is chairman of the supervisory board - both of them were involved in the original 2003 deal and will continue to lead the company as a public entity.
Jacek Korpala is co-managing partner of Arx.

Enjoyed reading this article? View the LIVE version at the unquote" CEE Private Equity Forum 2014 - this year taking place in Warsaw on 8 April. For full agenda and registration information visit: ceepeforum.com

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