JAG Industries, Inc., a small manufacturing company in Baltimore, Md., has acquired a new owner - and new lease on life - in a --- $5.4 million acquisition financed by American Capital Strategies (Nasdaq:ACAS). The $4 million acquisition financing requirement, completed in January 1998, was put together by ACAS in a record five weeks, which included the end of year holidays. This transaction will enable Gene Stluka, the new owner, to expand the company's two core businesses -- making precision metal components for original equipment manufacturers (OEMs) and manufacturing pills for animal consumption and testing applications. It also lays the groundwork for the company to establish an employee stock ownership plan (ESOP) for JAG's 27 employees.
JAG's predecessor company, Baltimore Machine & Equipment, was created in 1960 when Becton Dickinson, a large medical technology firm, spun off its metal working l operations. A former Becton manager became the new owner and set up shop serving Becton Dickinson's machining and metal fabrication needs. In 1986, three other Becton employees purchased the company from the founder's estate and continued operations for more than a decade, providing a high level of quality and service to their customers. The company's group management became burdensome, however, and business slid into a holding pattern. Although repeat business was an impressive 90% of sales, new business was being not a priority and potential growth opportunities were neglected.
Despite the lack of business development, JAG Industries was a stable, mature company with $3.7 million in annual sales. The company's fabricated sheet metal and precision machining operations are used by OEMs in high-precision, high-value products as well as in manufacturing production lines. Over time, JAG Industries has diversified its Becton customer base to make such products as metal door seals for commercial ovens; metal forms used in producing the packaging for Revlon cosmetics; and cabinets, frames and computer card racks for Patriot missile systems. Its pill and tablet production include vitamins for hogs and poultry as well as pills to balance pH levels in aquariums. In its pill production, JAG helps its customers formulate their products and then manufactures them in a controlled environment.
When the owners decided to pull out of the business, Gene Stluka, a seasoned manufacturing executive originally from General Electric, stepped up with a partner to buy out the company. The partner, however, pulled out just days before a closing scheduled for December 1997, dissolving financing arrangements and jeopardizing the acquisition. It was then that Stluka's financial advisor approached ACAS, a specialty buyout and finance company that could offer the capital resources and experience to rescue the deal. In financing the acquisition, ACAS purchased $4 million in senior and subordinated notes with warrants. This included a working capital loan that will be replaced by a traditional line of credit after the closing.
It was important that American Capital could handle all aspects of the transaction, according to John Freal, the ACAS principal who helped negotiate the deal. "Although this was a complicated acquisition, ACAS responded rapidly for JAG's need for a strong financial partner," Freal said. With capital resources of more than $150 million, ACAS provides senior debt, subordinated debt, and equity financing to help finance the purchase of small and medium-sized companies and to provide companies with capital for growth or liquidity. ACAS provides $1 to $20 million to businesses which typically have sales of $10 to $200 million. With the JAG Industries financing, ACAS has invested a total of $24.6 million since its initial public offering in August 1997.
As JAG Industries' new president, Stluka is excited about the potential to expand the business and is looking forward to significant growth in both JAG's product lines. Stluka sees the pill business in particular as a major growth area and wants to pursue the possibility of contract work for large pharmaceutical companies. "JAG has a high quality, low-overhead production operation, supported by product development skills. These capabilities are well suited to the smaller runs (100,000 to 5,000,000 tablets) often needed to serve the testing, aquatic, and agricultural markets," Stluka says.
In addition to having a personal stake in the transaction, Stluka intends to work with ACAS to set up an employee stock ownership plan for J.A.G employees. An ESOP is generally not available in a company this size and represents a unique opportunity for the employees, enabling them to take advantage of the company's potential for significant growth.
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