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Gates' sale to equity firm set to close in third quarter

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DENVER—The company holding the reigns of Gates Corp. once again will change.

In the second blockbuster acquisition within the rubber industry in 2014, Blackstone Group L.P., a private equity funds firm, agreed to buy Pinafore Holdings B.V., the Tomkins P.L.C. holding entity that oversees Gates, from present owners Onex Corp. and Canada Pension Plan Investment Board for an estimated $5.4 billion.

In the first major purchase earlier this year, ContiTech A.G. announced plans to acquire competitor Veyance Technologies Inc., doubling its size in North America in the process, for about $1.91 billion. That deal is expected to close in the third quarter.

The transaction involving Blackstone and Gates is subject to customary closing conditions and regulatory approvals and is expected to be finalized in the latter part of 2014.

“It was a tough decision to sell Gates,” according to Seth Mersky, a senior managing director at Toronto-based Onex, which has offices in New York, Toronto and London. “We don't see many industrial businesses with its global brand recognition.

“Nonetheless, Onex shareholders and our limited partners have done very well. We have thoroughly enjoyed partnering with the Tomkins management team and wish them continued success.”

“Blackstone is one of the largest equity and advisory firms in the world with $16.2 billion in capital in Blackstone Capital Partners Fund VI,” said William R. Ridenour, president of Polymer Transaction Advisors, a merger and acquisition advisory company based in Newbury, Ohio.

Three keys for Blackstone

Any time an equity firm purchases a large business from another equity company, “it must make sure it gains a profit for five years or so,” he said. “That really means in the next three to seven years, so it can sell the business when the market is right.”

He said three things need to happen for Blackstone to be in a good position within that time frame: pay down the acquisition debt; do everything possible to ensure continued earnings growth of the business; and purchase major companies that fit with Gates to further build its capabilities.

“The end objective is to further increase earnings through business synergies, cost-cutting within the original company and the subsequent acquisitions added to Gates,” Ridenour said. “We've seen private equity firms sell an acquired company two or three times to larger private equity firms or strategic buyers.”

One of the top global manufacturers of power transmission belts and fluid power products for the automotive and industrial sectors, Gates closed fiscal 2013 with sales of about $2.9 billion. More than $1 billion of those were in the U.S., while Europe accounted for in excess of $700 million in sales.

It derives a majority of its revenues from products, including hose and belts, produced for the replacement market worldwide. The company is comprised of four operating segments: Gates North America; Gates Europe, Middle East and Africa; Gates Asia and the Pacific Region; and Gates South America.

The manufacturer of power transmission belts, hose and other industrial goods sells to more than 120 countries from its operations in 27 countries. As of December 2013, it employed about 14,000 around the globe.

In late 2013, CPPIB and Onex began pursuing a dual-track exit of their investment by exploring an initial public offering and sale of the company as ways to exit their investment.

Shrinking Tomkins

Gates was by far the largest asset within Tomkins, which Onex and CPPIB bought in 2010. Tomkins, a large industrial holding firm at the time, had purchased Gates in 1996.

Tomkins is a London-based industrial holding company that at one time operated numerous businesses across the globe.

Once the sale of Gates closes, Onex and Toronto-headquartered CPPIB will have divested eight of nine divisions under the Tomkins umbrella, with aggregate proceeds totaling about $7.9 billion.

Most of Tomkins' remaining management staff will exit with Gates, leaving Tomkins with just one division, bath and whirlpool producer Aquatic.

“This has been an excellent investment for CPPIB,” said Andre Bourbonnais, senior vice president of private investments for the investment business, which has offices in London, New York and Sao Paulo, Brazil.

He said CPPIB has enjoyed a very successful partnership with the Tomkins management team, and he believes “Gates is poised for continued outperformance.”

Onex, with a 56 percent stake, and CPPIB, which holds a 42 percent interest, will receive about $3.5 billion in proceeds when the deal closes later this year.

The will bring their total proceeds to approximately $4.7 billion, or 2.2 times their initial investment, according to a statement released by the two funds.