On April 12th, the mini-conglomerate Compass Diversified Holdings (NYSE:CODI) announced that its largest portfolio company, Staffmark Holdings, would be filing for an IPO (or “Initial Public Offering” for the uninitiated into finance-speak). Staffmark is a national provider of contingent workforce solutions that serves the temporary staffing needs of employers throughout the United States. At this stage there are very few details about such important items as the number of shares to be offered to the public, the price, etc. We’ll have to wait for further details.
A Quick Preamble: Compass Diversified is not a Business Development Company (“BDC”), but a Grantor Trust (which is a different legal structure). Unlike a BDC which typically lends to third party borrowers, and may own a minority equity interest in some of its borrowers, Compass owns a controlling interest in all of its portfolio companies and consolidates all the businesses on its balance sheet. However, the BDC Reporter has tracked the company for years because it shares many traits with its BDC brethren: i) involved in financing the private company middle market; ii) provides substantial disclosure on portfolio holdings; iii) pays a regular dividend.
Our Two Cents: Maybe it’s too early in the process to have much to say about Staffmark’s IPO. However, it’s still a relatively rare occasion when a lower middle market private equity conglomerate such as Compass actually gets the opportunity to take a portfolio company to the public markets, and reap the bulk of the benefits. Compass has sold three companies previously in its history, but never racked up an IPO. Smaller BDCs often own minority stakes in private companies, or even controlling positions, but their exits usually consist of selling the business to another equity group or a strategic buyer. So we thought yesterday’s news was worth marking. We used the opportunity to review what we know from the Company’s public filings about Staffmark, and how the entity fits into the larger Compass Diversified portfolio. We also suggest a number of questions that we should be asking ourselves about how the IPO might impact Compass Diversified’s balance sheet, income statement and corporate governance going forward.
For a quick snapshot of Compass, we went to the company’s recent Investor Presentation on its website, which provides a useful overview. Here are some of the highlights:
- Compass owns controlling interests (but not 100%) in 8 different portfolio companies.
- Staffmark is the largest company in the CODI universe, both by sales and EBITDA contribution.
- CODI’s subsidiary companies generated $140mn in EBITDA in 2010, of which 26% (or $36mn) was derived from Staffmark (see page 13).
- CODI’s second largest subsidiary accounted for 21% of EBITDA (Advanced Circuits).
- Staffmark’s results have varied widely over the past 3 years. Not surprisingly, the temporary staffing business is heavily influenced by the business cycle. In 2008, Staffmark’s EBITDA was $35.5mn and represented a third of total EBITDA of Compass, which only had 6 portfolio companies at that point. However, in 2009, Staffmark’s EBITDA dropped to $7.5mn, and only accounted for 10% of the parent’s combined EBITDA. In fact, Staffmark was fifth out of the six CODI companies ranked by EBITDA in the midst of the recession. 2010′s results indicate Staffmark has returned to the EBITDA levels achieved in 2008 (see page 14).
- Staffmark’s total sales increased from $745mn in 2009 to reach over $1.0bn in 2010, and is said to be gaining market share at the expense of smaller competitors (see page 21).
A FEW QUESTIONS
Here are a couple of preliminary questions we have been asking ourselves about the implications of Staffmark’s IPO:
- How much, if any, stock of its subsidiary will Compass sell to the public ? Technically, Staffmark could just issue new stock to raise growth capital. More likely that Compass will sell 30-50% of its ownership, but we’re private company focused commentators, not public markets so that’s just a guess.
- Will Staffmark continue to pay a dividend to its parent ? The way Compass is structured currently subsidiaries such as Staffmark funnel distributions up to the parent, who services the debt, pays its own operating expenses and distributes dividends to the public shareholders (see page 23). Following an IPO that structure may have to change. Compass may even have to de-consolidate Staffmark from its financials, which would drop revenues and earnings substantially. Instead, the Staffmark equity still owned would be recorded as an investment asset.
As we said at the top, this is new territory for Compass and much needs to be learned about both the Staffmark IPO itself, and how it may reshape Compass Diversified’s balance sheet, income statement and relationship with its largest (but soon to be former) subsidiary. Keep tuned to the BDC Reporter for a further update.
Disclosure: I am long CODI.