This Month: A Quick View of Rollups

Consolidation strategies or "rollups" continue to be popular devices to create value for investors in private companies. Despite the cyclical nature of large public market transactions and highly leveraged deals, we continue to see an active interest in rollups.

A number of management and investor groups today are pursuing fragmented industries and looking to create an industry leader on a national or regional level by combining a number of smaller companies. The most common approach is the "build-up" or "buy and build" strategy, which uses private equity and debt for the initial acquisitions. Most of our clients pursue an initial acquisition of a "platform" company followed by a succession of "add-on" acquisitions.

Here are some of the frequently cited characteristics of industries that are appropriate for rollups:

High fragmentation (i.e., numerous and relatively small competitors);
Substantial industry revenue base;
Mature industry (moderate to slow growth in overall industry revenues);
No dominant market leader and few, if any, national players;
Critical mass achievable with a manageable number of acquisitions;
Achievable economies of scale (i.e., opportunities to reduce costs through consolidation);
Opportunities to increase revenues with national coverage or brand; and
Many willing sellers with profitable operations.

TODAY'S "STRATEGIC ROLLUPS": In earlier periods we saw rollups by financial buyers focused on industries with very large numbers of virtually identical companies. However, in today's market, we see both strategic and financial buyers pursuing buy and build strategies with a platform company and a smaller number of add-ons that may be quite different, though they are usually within the same industry segment. For example, we are working with a frozen dessert products company, and this company is in the process of making a number of acquisitions in frozen ethnic foods, in order to capitalize on its frozen plant capacity and also its strong channel of sales into the frozen food aisle.

Our focus on critical financial diligence on behalf of buy-side clients
Current market for leveraged financing of middle market buyouts