Will ‘OnCore’ Deal Spur Encores?

Fascinating how aggressive Natel Engineering has been with acquisitions over the past 18 months. First it gobbled up Epic, and this week it announced plans to nab OnCore. Epic was roughly 2.5 times the size of Natel at the time of that deal, and OnCore is almost the same size as Natel is now. Combined, they will form an EMS business with pro forma revenues of $770 million, 13 manufacturing sites and more than 3,700 employees.

And to think that as recently as September 2013, Natel had sales of $100 million spread across three factories, some of which were hybrid thick film, not SMT. That’s a stunning transition.

Can it hold? This latest deal is highly leveraged, and Moody’s gave Natel a B2 CFR rating, (obligations rated B are considered speculative and are subject to high credit risk; the 2 refers to mid-range) and a B1 LGD3 (loss given default) assessment (meaning ?30% and <50%, in Moody’s opinion). After the close, Natel will end up with $340 million in debt, between the new lender and a $60 million note issued by OnCore’s owner, Charlesbank Capital.

We’ve seen huge runups in the past, sponsored by equity capital, that have  burst into flames because the market couldn’t provide the necessary growth to sustain the acquirer’s debt payments. Viasystems is perhaps the most notorious example; that company ended up going through bankruptcy before finally stabilizing and operating in somewhat lower-key manner up until its announced acquisition by TTM Technologies last year. Flextronics went through one major flameout in 1990 before reappearing as a Singaporean company. Of the CIRCUITS ASSEMBLY Top 50 however, today most are few of undue private equity influence.

For those wondering what EMS or PCB companies might be veering toward financial distress, here’s an interesting tool. I’m guessing Jabil ranks relatively highly on this because of its high exposure to Apple. Companies also seem to be penalized for a high P-E ratio.

2014: The Year of the Deal

Today brings to an end one of the most fascinating years of acquisitions since the crazy Internet era of late 1990s and 2000.

Unlike that episode, however, 2014 was a much more orderly state of affairs, and while some of the deals were not foreseen, the pricing (and volume) were within the realm of reason.

To recap:

  • TTM Technologies announced it would buy Viasystems, bringing to a close one of the most talked-about chapters in PCB industry history. The deal has cleared all but the last few regulatory hurdles, and is expected to close in mid 2015.
  • Rogers will buy Arlon, merging two leading suppliers of high-frequency laminate materials, and perhaps further complicating the supply chain for some of the smaller fabricators that lack the purchasing power of the major players, not to mention consolidating the RF/microwave product supply base for the US Defense Department. Given its shoulder shrug of TTM’s Chinese ownership, will the DoD even bat an eye over this, or will it be concerned enough to throw a wrench in the deal?
  • On the assembly side, ASM purchased DEK, which had been readied for sale since late 2011. The acquisition gives ASM top-of-the-line print-to-placement equipment offerings and positions it to compete with the major Japanese players such as Panasonic, Yamaha, Juki and Fuji.
  • Nordson acquired Dima Group, stretching its traditional dispensing and, later, AOI and test focus into SMT placement. Will Nordson keep the pick-and-place lines, or package that unit up and sell it?
  • Likewise, Amtech Systems has a pending agreement to buy BTU, stretching its semiconductor and solar production focus to include SMT reflow.
  • And just yesterday Kulicke and Soffa made a deal to buy Assembleon for $98 million in cash. While Assembleon had been expected to be acquired since Philips first put it on the block several years ago, K&S’s entry into the printed circuit board equipment space was unforeseen. Does it plan to continue to roll up other companies (Speedline?) and build a worthy competitor to ASM?

Most of the major deals that took place in 2014 happened on the supplier side. Does that presage a similar consolidation on the manufacturing end in 2015? Will some of the units long-rumored to be in play (Multek, Hitachi) finally be consummated? Will EMS, which took a breather in 2014 after major deals involving Natel (Epic), Benchmark (Suntron, CTS) the year before, catch a new spark?

We can’t wait to find out. Happy New Year!


The End of the Viasystems Era

At long last, the hunter became the hunted.

TTM Technologies today announced its pending acquisition of Viasystems. The deal, expected to close in early 2015, will vault TTM to second place among the world’s largest PCB fabricators.

No matter how the deal turns out for TTM, Viasystems will remain one of the most talked about PCB companies in the industry’s history, held in awe for its audacity and blamed on multiple continents for nearly single-handedly devastating local supply chains.

For the entirety of its 18 years, Viasystems was worth 10 times its revenue in industry controversy and chatter. It sprung on the scene in fall 1996, the brainchild of New York investment firm Hicks, Muse, which in quick order bought up AT&T’s board shop in Virginia, Circo Craft, Kalex, Forward Group, ISL, Mommers and Zinocelere, plus several EMS and peripheral businesses. They were the Yankees of the PCB world, albeit without the same level of success.

Then came the Tech Recession of 2001, and Viasystems’ debt ballooned to over $1 billion. Two Chapter 11 restructurings and countless lawsuits later, the company stabilized and managed to spend the better part of the rest of the decade simply managing the business.

In 2010 the veil was lifted. Viasystems resumed its buying ways, snatching up Merix and then, two years later acquiring DDi (which in turn had gobbled up Coretec). Yet consolidation didn’t bring happiness. Over the years Viasystems found it nearly impossible to turn a consistent profit. Debt, a persistent problem dating to its Hicks, Muse days, now sits at $561 million.

TTM is getting Viasystems for $16.46 per share, or about 6.8 times adjusted EBITDA. You tell me if that’s worth it.

I would expect TTM will sell off Viasystems’ wire harness business, which is small ($174.6 million in 2013) relative to the rest of the business and has shown operating losses in five of the past seven quarters. Viasystems has already consolidated its China manufacturing base, so I would not expect much change there. TTM is running at 75% capacity in China but only 60% in North America. TTM has seven sites in North America and Viasystems has nine, including a combined three in the Silicon Valley and two in Orange County. Perhaps they will seek to consolidate here in order to boost rates.

Viasystems changed the way the world viewed the industry. It forced Wall Street to take notice. It laid waste to the regional landscape, ultimately closing millions of sq. ft. of some of the once-best shops in the world. Some will say this was inevitable. Viasystems bought plants that were obsolete or quickly headed that way, whose workforces could not change even while the technology was quickly shifting away from them. And the firm tied up enormous amounts of capital in dubious debt deals that may have enriched a few but certainly did not leave their business units with the balance sheets necessary to operate in such a cyclical market.

There’s still time for the deal to fall through, and it took about 18 seconds before shareholder lawsuits began piling up. No matter what happens on the ground, come next spring, Viasystems will again occupy the rarest air of the PCB world. It just won’t be as Viasystems.

Viasystems: An Eye on Details

Is Viasystems up to its old tricks?

The PCB fabricator today announced a deal to acquire DDi for $268 million, a move that will push the company back into the industry top 10 for the first time in years.

Keep in mind, 12 years ago, Viasystems was the second largest PCB company in the world, behind Sanmina, with sales of about $1.25 billion. The deal pushes Viasystems past that mark for the first time since 2001. That’s when the dot.com market imploded, and telecom was wiped out, taking much of Viasystems’ capital with it.

That disaster made Viasystems something of an industry punchline. Two bankruptcies followed, plus a high-profile takedown of the venture capitalists behind the company, and some expected the entity to collapse like a black hole. But lo and behold, the remaining management wisened up, stopped buying other people’s garbage with other people’s money (Viasystems paid cash for DDi), and concentrated on learning the business. They shuttered money-losing operations in the US and Europe, and broadened their focus to automotive. Oh, and they learned being smaller and profitable is better than being the biggest and bleeding.

What a difference a decade makes.

What this means for Mikel Williams has not yet been revealed. The DDi CEO remade the company, which also suffered badly after a series of management missteps and internal struggles. Profits have improved four years running (revenues took a minor hit in 2011), and the company successfully absorbed smaller rival Coretec without a hitch. One hopes Williams stays in this industry; he’s a star and would be missed.

Also watching this closely will be Shennan Circuits. DDi reportedly outsources some of its larger orders to the China-based board shop. That is certainly about to change.

Viasystems, 15 Years Later

This fall marks the 15 year anniversary of Viasystems. Who woulda thunk it?

When Hicks, Muse, the investment firm behind the PCB manufacturer, first hit the scene, in fall 1996, it quickly made a statement like no other in our industry, before or since. In quick succession, they snagged AT&T’s board shop in Virginia, Circo Craft, Kalex, Forward Group, ISL, Mommers and Zinocelere, plus several EMS and peripheral businesses. Longtime shop owners stood in line, waiting to be bought out.

When things crashed in 2001, it looked for a while Viasystems couldn’t hold up. Debt was over $1 billion. Bankruptcy beckoned.

But David Sindelar, the company’s original CFO who was named chief executive in July 2001, has turned things around. Such stories aren’t as common as we might hope in the PCB industry, where high capital investment and maintenance costs and severe pricing pressure make life excruciating for even the handful of companies that don’t misstep. It’s an industry that doesn’t easily forgive mistakes.

Now, as he approaches 10 years on the hot seat, Viasystems is profitable and it’s long-term debt is down to $215 million, even after its high profile acquisition of Merix. Sanity has returned; Hicks, Muse’s influence is nowhere to be seen.

It’s a great, albeit unlikely, story.

More Plants, More Headaches?

I have to admit, Viasystems’ decision to pour up to $100 million into capacity expansions worries me just a tad.

Ours is a boom/bust industry, characterized by periods of substantial growth followed by years of sheer gut-wrenching pain. I’ve been through four of these cycles in my 20 years in PCBs, and what’s clear to me is that, overall, there is ample capacity worldwide to suit the PCB industry’s needs.

Granted, a large amount of the funds are earmarked for machine upgrades, and Viasystems has not publicly stated how much of the investment will be geared toward additional space. Not to pick on Viasystems, because this problem clearly is industry-wide, but what I’d like to see is more than three quarters of growth coupled with the possibility of more to come before the industry starts ramping capacity. Pricing has long been a problem for PCB fabricators. Adding capacity won’t fix that.

Game Over for Ex Board Baron

Remember Hicks, Muse?

Those were the first two names of the now infamous Wall Street Investment firm (full name: Hicks, Muse, Tate and Furst) that took the PWB industry by storm in the late 1990s and early 2000s. Starting with its Fall 1996 purchases of AT&T’s board shop in Virgina — a 700,000 sq. ft., 120-acre site considered to be among the largest in the world at the time and Circo Craft, Hicks, Muse embarked on a series of acquisitions that has no match — before or since — in our industry.

The firm bought Termbray Industries’s PWB business (aka Kalex), Forward Group, ISL, Mommers, Zinocelere, and made a strong play for Zycon before being nosed out by the shrewd maneuvering of Hadco’s Andy Lietz. (Lietz’s captivating telling over dinner of how Hadco came to buy Zycon remains my favorite memory of those years.) And that doesn’t even begin to cover the EMS and enclosures acquisitions. In 2000, they went public.

Eventually, the bubble burst. Debt topped $1 billion. Viasystems underwent a series of management changes and bankruptcy. Hicks doubled down his investment in the company, converting its debt into equity, and was promptly sued. The firm scheduled another IPO, then pulled the plug. Mass shutdowns ensued.

In 2004, Hicks left the PWB business. But before he bailed, he had bought the Texas Rangers, a major league baseball team, and the Dallas Stars of the NHL, and immediately spent hundreds of millions trying to buy championships in those sports. Those of us in the PWB industry could have seen what would come next.

Fast forward to today, and those who still simmer from the slash and burn he ultimately inflicted on the industry may take some small satisfaction in knowing he has hit such financial difficulties — his Hicks Group is said to be $525 million debt — he will be forced to give up the Rangers.

The story of Tom Hicks will make a great case study some day, but it will be for all the wrong reasons.

Board Buying Bonanza?

Here we go again?

DDi today proposed acquiring Coretec, a move that would close the gap between the California-based DDi and its quickturn rival, TTM Technologies.

It also marks the second potential M&A deal between “brand-name” board fabricators in the past four weeks. Earlier this month, Viasystems announced a pending acquisition of Merix.

Unlike the Via-Merix deal, while the impact wouldn’t be big in terms of the worldwide PWB fabricator rankings — likely boosting DDi from the low 60s to the top 50s in terms of size — it could change the pricing model for many board shops. DDi and Coretec have both invested heavily in HDI capability and have complementary markets (defense, telecom, quickturn/prototypes). It also would give the merged company a footprint in each of the continental US time zones. DDi had fiscal 2008 revenues of $190 million, while Coretec closed the year at C$81 million.

It strikes me that Coretec’s announcement late Friday that it would seek a cash infusion through the sale of 10 million shares of common stock was all the opening DDi needed to pull the trigger, especially given the relatively low market capitalization of Coretec.

This would be DDi’s first acquisition since its purchase of Sovereign Circuits in October 2006. DDi, of course, often made headlines in the last 1990s and 2000 as it bought company after company, building a PWB operation that once ranked among the top 20 worldwide. Simultaneously, Viasystems was doing much the same, only for both companies to hit the skids during the 2001-03 tech recession.

Today’s announcement makes sense, given the relatively cheap price DDi would have to pay to get Coretec. Whereas today’s headlines have certain echoes of 2000, it’s highly unlikely the risk of fallout is anywhere close.