Deal in Focus: 3i sells Hilite to Chinese trade buyer

AVIC Electromechanical Systems acquired Hilite for €473m, which allowed 3i to reap a 2.3x money multiple on its original investment of €190m in May 2011. The GP will net proceeds of £155m in the transaction – a 17% uplift against Hilite's valuation of £133m as of March 2014.

The 1,370-strong company generated revenues of €389m in 2013 and was sold for approximately 8x EBITDA. Between 2010 and 2013, Hilite claims to have grown at a rate of 15% CAGR, compared to an industry average of 4.5%.

Founded in Ohio in 1999, Hilite suffered during the financial crisis – the company's lenders became involuntary owners and were looking to sell. Cue 3i's entrance.

"We became very interested in the business in 2010 and we made up our minds to become the next owner before the auction," says Ulf von Haacke, managing director at 3i. Having previously invested in auto parts supplier Norma Group, which 3i floated in a €669m IPO in April 2011, the GP felt it had enough experience in the automotive sector to improve Hilite's lot, wholly acquiring the business in an all-equity transaction: "We felt it was what was needed. It didn't make sense to constrain the business's growth by putting debt onto it and having to service that debt," says von Haacke.

The next stage for 3i was to move the business from Ohio to Marktheidenfeld in Germany and promote the head of sales to CEO, among other staff changes. It then divested Hilite's Selective Catalytic Reduction (SCR) division – the company's non-core emissions control business – to Cummins at 15x EBITDA in May 2012.

"We exerted a lot of influence on the business at the start. The SCR sale allowed us to monetise almost 50% of our investment one year into the deal, which meant that we had more time and attention to focus on the core business and expansion into China," says von Haacke. All the profits made during 3i's ownership – more than €100m – were reinvested, meaning that Hilite was sold without any net debt.

Made in China
At the time of the initial purchase, 3i invited China Investment Corporation (CIC) – one of the country's biggest sovereign wealth funds – to take a small stake in the company. "The story we were investing in was taking Hilite from a western business and aggressively helping it to focus on Asia. We felt that it would make us more credible to have an investor like CIC, with its extensive government relationships, on board," says von Haacke. And it seems that 3i was right to make that assumption: "It gave AVIC huge comfort to know that their fellow countrymen had invested and they were able to tell them how the company had developed over the three years."

Hilite now has two plants each in the US and Germany, a Chinese plant and a German development centre. It is the preferred supplier of VW, Audi, Chrysler and General Motors among others and expects to see 17% of global sales originate in China. "When we invested we had a five-year plan, but it's fair to say we progressed quicker than we initially anticipated," reveals von Haacke.

This led to 3i's earlier-than-expected divestment of the business. Selling the SCR arm made the firm more focused and attracted renewed interest from players who had initially bid in 2011. "We had 12 companies hand in a first bid so it was a hugely sought-after business from a strategic perspective. That basically led to our exit at the right price."

People
Ulf von Haacke is managing director of 3i. Karl Hammer is CEO of Hilite.

Advisers
Equity – Morgan Stanley (Corporate finance); Wilkie Farr & Gallagher (Legal).

Enjoyed reading this article? Meet over 80 GPs and LPs at the annual unquote" DACH Private Equity Forum taking place 7 October in Munich. For more information on the agenda and speakers confirmed visit the website here.

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