When the board at American Packing & Gasket L.L.C. decided that it was time to seek out new owners for the employee stock ownership plan-owned company, it turned to a familiar party.
CapStreet Group L.L.C. had owned Knoxville, Tenn.-based APG from 1999-2003, before selling it to private investors. In 2005 the firm converted the ownership to an ESOP, and had operated that way for more than a decade before the board decided it was an opportune time to maximize the value of the shares for the employees, according to Ed Solymosy Jr., APG president and CEO.
“Market conditions for a sales transaction were favorable,” he said during the recent NAHAD annual convention in Marco Island. “So to take some risk off the table for the employees, it was deemed a good time to look in the market,”
After talking with a number of suitors that had showed some interest in APG in recent years, the decision was to sell back to CapStreet Group. The private equity firm in partnership with members of APG senior management completed an asset purchase of the firm at the end of February. Terms of the deal were not disclosed.
“Fortunately we’re with a partner that knows the history of our company and has been with us before,” Solymosy said. “They also had equity in (distributor) GHK for some time, so they understand our business, the market and our customers.”
Ups and downs
Founded in 1943, APG is a master distributor and manufacturer of a broad range of MRO products, including gaskets, packing material, O-rings, industrial hose couplings and other items used in the manufacturing and process industries for maintenance and repair of a variety of industrial equipment.
Solymosy, who joined APG in 1995 and has been president and CEO the past six years, said the firm has faced some interesting challenges in recent years. “We certainly saw the downturn in the market with oil falling,” he said. “Our peak was October 2014 and our low was February/March 2016. Now two years later we see substantial recovery. So it’s been an interesting business cycle to manage the end of the ESOP through.”
Before, APG derived roughly 10-15 percent of its business from oil and gas; now that figure is closer to 20 percent.Some of its business to the sector is direct, but other was indirect, selling to companies that provided capital equipment to the industry, Solymosy said. “The combination we had on a direct basis and those on an indirect bases as cap-ex suppliers really put a pressure on our markets.”
The rebound in the price of oil from February 2016 has helped the industry rebound, though that has brought with it an uptick in the prices for products derived from petroleum, including rubber.
“It’s been quite a contrast to go from 2014 to 2016 to 2018, and see market swings that have been quite dramatic,” he said. “We’re glad to be back on the upside. It’s a lot more comforting, although it’s challenging with the return in commodity prices upward. But it’s more fun to manage that way than it is to manage on the down side.”
Operating an ESOP
Solymosy said the strongest benefits to being an ESOP company is to see the employees reach a more substantial means to funding their retirement. “That’s what we’ve been able to accomplish, and we’re very proud of that.”
There also are challenges, such as managing obligations to fund what is called “diversification.” That is an ESOP clause that allows employees with a specified amount of tenure to convert a percentage of an individual’s ESOP account into a private 401(k). It’s also a cash obligation that must be met by the company, according to Solymosy.