Case: Brazos Partners: The Comark Lbo

FINS 5538

Xinyu Zhu

5086026

Case: Brazos Partners: The CoMark LBO

1. Is CoMark an attractive LBO target? What would the key elements of Brazos Partners investment thesis be. What would you see as the risks around the proposed deal?

Yes, CoMark is an attractive LBO target. Firstly, it is a reasonably priced company with solid cash flow, good management, and a well-defined niche in building modular structures which fits exactly in Brazo’s “sweet spot”. Secondly, it is an operation owned by two families, while Fojtasek has a unique understanding of both the operational and familial issues involved. Moreover, the first fund had to close a deal, the partners were feeling some pressure.

2. What are the key strategic and/or financial value drivers of the Comark deal

Comark ran units down the production line side-by side which is an innovative and efficient approach. Moreover, Comark sold directly to the end-user. The same sales involved in every step of the sales and production process. Direct sales conferred significant benefits, including pricing power when competing with dealers, the ability         to tailor a solution to an end-user’s needs, higher gross margins and greater control over all aspects of the project. Six-month sales training is another strategic value of the Comark. One of the Comark’s competitive advantages is that Comark had a large number of government contracts which is not easy to get.

3. How attractive is the purchase price?

This price of 40 million is not too much attractive. The founders of Comark were projecting EBITDA of an unsustainable level. Furthermore, the lack of flexibility in regard to price made the purchase price less attractive to the fund.

4. How did Brazos Partners structure to deal to try and mitigate earnings risk?

Brazos Partners suggested a minor modification to address the sustainability of EBITDA. They offered to purchase the company for 38 million in cash at the closing and 2 million payment for each of the next two years if Comark hits 2002 and 2003         EBITDA projection.