KKR’s Buyout of C.H.I. Overhead Doors: Mastering Operational Turnaround Strategy

Introduction

Kohlberg Kravis Roberts & Co. (KKR), the Private Equity (PE) firm often credited with inventing the leveraged buyout (LBO), has once again proved itself to be an industry pioneer through a masterful turnaround and sale of C.H.I. Overhead Doors, a manufacturer of rolling steel, garage, and commercial doors based in Arthur, Illinois. The LBO provided the limited partners in KKR’s North America Fund XI a 10x return on equity invested. KKR purchased C.H.I. for $600m in July 2015 from Friedman Fleischer & Lowe, before selling it to Nucor Corporation for $3bn in 2022. Naturally, KKR used equity to finance half of the deal, while the other half was financed through debt. In terms of transaction advisors, KKR and C.H.I. had employed Goldman Sachs as lead M&A advisor, UBS as M&A co-advisor, and Kirkland and Ellis as legal advisor.

Fund	Fund Size	IRR
KKR North America Fund XI	$9B	19.0%
Advent Global Private Equity Fund VII	€8.5B	16.7%
Warburg Pincus Private Equity Fund XI	$11.2B	12.7%
Green Equity Investors VI	$6.25B	11.4%

The astonishing multiple KKR generated on this transaction can be explained by C.H.I. ’s organic growth as it relates to financial performance. Due to KKR’s operational turnaround, EBITDA increased almost fourfold, the EBITDA margin grew from 21% to over 30%, and sales grew by almost 120%. This financial performance was enabled by several initiatives: namely the construction of a second door-manufacturing plant in Indiana, optimization of working capital, improvements in supply chain management and procurement processes, and scrap and waste reduction. This proves that KKR, and PE, have come a long way from the management-firing, drastic cost-cutting stereotypes that were epitomized by “Barbarians at the Gate,” a 1989 book about KKR’s hostile takeover of tobacco firm RJR Nabisco. In fact, C.H.I. management remained upon KKR’s exit, and this transaction demonstrated how PE could create positive value for all of a portfolio company’s stakeholders through a model spearheaded by KKR’s Pete Stavros – employee ownership.

Though the masterful execution of the aforementioned margin expansion measures such as scrap-minimizing and working capital optimization cannot be under looked, what makes this deal so iconic was the mechanism that bolstered productivity, and subsequently, financial growth – employee ownership.

How Employee Ownership Creates Value

Introduced by the U.S. Congress in 1974, employee share ownership plans (ESOPs) aim to promote a broader distribution of wealth. An ESOP is an employee benefit plan set up as a trust fund, giving employees shares of stock in their employer. Said fund is financed by the company, be it by issuing new shares or the use of debt and/or cash to acquire existing ones.

Firstly, to incentivize the establishment of ESOPs, Congress introduced several tax benefits for the firms implementing these programs. If a loan has been taken out to effectuate an ESOP, contributions made to repay debt, including both the principal and the interest, are tax-deductible. Additionally, in the United States, employee share ownership programs are tax-exempt from corporate tax (21%) on the percentage of its ownership in the ESOP.

Moreover, the prospect of an ESOP can also be enticing from a managerial point of view. By sharing its ownership, a company aligns the interests of employees with those of the institutional shareholders. Consequently, workers can be more motivated and productive, as the company’s successes are also their own. In addition, it can lead to employees feeling more appreciated and rewarded for their input into the company. This could allow the company to attract and retain better employees, reducing labor turnover and the costs associated. Finally, if need be, this identification with shareholder interests would facilitate the implementation of tough operational decisions and reduce the intensity of labor-management conflicts.

KKR certainly considered these advantages when conducting the operational transformation of C.H.I. This wasn’t the first time KKR implemented an employee share ownership scheme, as it had been a staple in its portfolio since 2011; therefore, it was certainly a tried and tested system. Be that as it may, Co-Head of Americas Private Equity and Founder of the nonprofit organization Ownership Works, Pete Stavros, was so pleased with the outcome of C.H.I. that he went on to describe the firm as “a powerful testament that creating a culture of ownership works,” and credit KKR’s 10x exit multiple to C.H.I. ’s employees “showing up every day and thinking like owners.” As shown below, manufacturing firms such as C.H.I. are leading the charge when it comes to the implementation of ESOPs.

Following the sale of C.H.I. Doors to Nucor, over 800 employees who participated in the ESOP – spanning all hierarchical levels and functions – will receive a substantial payout. For instance, truck drivers, factory workers, and other hourly employees are expected to receive an average of $175,000. As a disclaimer, the employee share ownership scheme introduced by KKR was not a substitute for raises or financial remuneration; rather, it was a supplementary policy available free of charge to all employees earning below $100,000 per year. In addition, KKR also arranged for the 800 C.H.I. employees to get free financial coaching and tax services to make full use of the financial gains. These pre-paid services were arranged in conjunction with Goldman Sachs Ayco Personal Financial Management and Ernst & Young

Conclusion

This deal is a strong testament to the fact that PE funds can conduct operational turnaround and achieve margin expansion not only through orthodox cost-cutting measures, but through innovative productivity-catalyzing measures like employee ownership. KKR’s deal shows that employee ownership not only helps sponsors in achieving successful multiples arbitrage and strong benchmark-outperforming IRRs, but also allows employees to take advantage of growth opportunities along with general and limited partners, as KKR did.