- Buyout firm’s carve-out playbook wins deals, drives returns
- ‘Business was losing share’ under previous owner: dealmaker
When Carlyle Group LP orchestrated a $4.9 billion buyout of DuPont Co.’s auto-paint business in 2013, competitors said the private equity firm overpaid. Three years later, Carlyle has reaped its second-biggest profit ever on the deal.
The asset manager sold on Tuesday its remaining stake in Axalta Coating Systems Ltd., previously known as DuPont Performance Coatings. The $1.35 billion that Washington-based Carlyle plowed into the deal grew to $5.8 billion, according to regulatory filings, through a series of stock sales starting last year. Those included a $560 million block bought by Warren Buffett’s Berkshire Hathaway Inc.
Carlyle’s $4.5 billion profit, which translates to an annualized return of 80 percent, is second only to its investments in China Pacific Insurance Group Co. from 2005 to 2007. The profit from that deal, which Carlyle exited in 2013, was just $85 million higher.
Carlyle drew on a playbook 29 years in the making to carve the coatings business out of DuPont, a conglomerate of agriculture, construction, chemicals and electronics with a $60 billion market valuation.
Carve-outs have been a mainstay of Carlyle’s deal model since its founding in 1987. They’ve generated billions of dollars in profit on such companies as rental-car operator Hertz Global Holdings Inc., doughnuts and coffee purveyor Dunkin’ Brands Group Inc. and vehicle-parts supplier Allison Transmission Holdings Inc.
“The challenge for us is how to pay more than anybody else in the world -- because that’s the only way you win, really -- and still generate a good return,” Martin Sumner, a Carlyle managing director who led the Axalta deal, said in an interview. “Our carve-out experience played an essential role. We’ve gotten to a point where have some pattern recognition on these deals.”
Carlyle’s windfall comes as the asset manager struggles to generate profits from some of its activities beyond buyouts. The firm last week said it’s reviewing its credit and hedge-fund unit, and its fund-of-funds and international real estate businesses are trying to rebuild their profit generation.
Carlyle’s pursuit of the DuPont unit started before it was for sale, when Carlyle co-founder David Rubenstein met with DuPont’s then-Chief Executive Officer Ellen Kullman in 2011. DuPont had started calling the business a noncritical division, and Rubenstein told Kullman that Carlyle was interested in buying it.
Kullman wanted a formal sale process, so Credit Suisse Group AG ran an auction in 2012 and drew interest from a slew of private equity firms, including Apollo Global Management LLC, KKR & Co., Onex Corp., Blackstone Group LP and Bain Capital. After multiple rounds of bidding, Carlyle’s $4.9 billion offer came out on top.
“It was intense, competitive and our bid went up over time,” Sumner said. “But we’d gone into the auction process fully loaded.”
Apollo, which was just beginning to raise money for what would become an $18.4 billion private equity fund, bid in the final round. After Carlyle won, Apollo cited the auction in investor meetings to show how it refused to pay too much for assets, two people with knowledge of the matter said. An Apollo spokesman declined to comment.
Even before the deal was signed, Carlyle and Charlie Shaver -- a chemicals veteran who helped Carlyle conduct due diligence then led the new company as CEO -- identified ways to improve operations and expand capabilities for serving global automakers like Volkswagen AG, Ford Motor Co. and General Motors Co.
Competitors such as PPG Industries Inc., BASF SE and Akzo Nobel NV were battling Axalta for market share. To counter them, Shaver refocused the company’s auto-refinishing unit to win business from growing multi-shop operators, rather than individual car shops.
“The business was losing share because their customers were losing share to larger operators,” Wes Bieligk, a principal at Carlyle who helped lead the deal with Sumner, said in an interview.
Shaver also reorganized Axalta’s management to fit his strategy. DuPont had molded the unit’s leaders around specific products and regions, aiming to maintain cash flow for the parent company rather than grow earnings. Shaver wanted managers to focus directly on major customers and their needs.
“We replaced or reassigned 80 of the top 120 people in the company,” Shaver, 57, said in an interview in Axalta’s boardroom, overlooking downtown Philadelphia. “We wanted everyone to be market-facing, not insular.”
A representative for DuPont declined to comment.
Axalta benefited quickly. Earnings before interest, taxes, depreciation and amortization jumped 20 percent to $841 million in 2014 from the previous year, according to filings. Earnings rose 3.2 percent to $867 million in 2015.
By the middle of 2014, Axalta’s management had “worked their butts off” to put the plan in motion, said Carlyle’s Sumner, and several comparable companies were trading at all-time highs. They decided it was the right time for an initial public offering, which took place at $19.50 a share. Axalta now trades at $28.04, giving it an enterprise value of $9.6 billion.
Carlyle shed its stake in six disposals, including the IPO and the Berkshire Hathaway deal.
Amid Carlyle’s exit, Axalta isn’t slowing down, announcing four acquisitions on three continents in the past six weeks. Shaver said he wants to increase sales by 50 percent to $6 billion in the next three to five years.
“You have to be creative in today’s private equity world because there’s just too much capital out there chasing deals, and carve-outs are a way to do that,” said Jeff Warren, head of the alternative asset practice at consulting firm Russell Reynolds Associates.
“The firm and its CEO at the company need to be experienced in complex deals, because once the clock starts ticking it’s a race against time to create value.”