UPDATED: Berkshire Sells ADS Stake to American Securities

Earlier in September, Berkshire Partners exited its investment in United BioSource through a sale to strategic buyer Medco Health Solutions. The $730 million sale represented a rare quick flip in today’s market, as Berkshire’s initial investment was made only 11 months earlier. Today, Berkshire announced an exit on the other end of the spectrum, selling its ownership position in Advanced Drainage Systems (ADS) after a 22-year holding period.

Terms of the ADS sale were not disclosed. However, the investment – through multiple liquidity events – qualifies as a home run for the Boston firm and its investors.

Berkshire initially backed in the company in 1988, supporting management in a recapitalization, with the investment taking the form of equity and subordinated debt.

Based in Hilliard, Ohio, ADS manufactures and distributes corrugated high-density polyethylene pipe products, used in applications such as sewer systems, storm-water retention, residential and commercial construction, and agriculture.

The introduction of an Employment Stock Option Plan in 1993 provided a partial realization for Berkshire. Multiple dividend recaps translated into additional liquidity events, and in 2002, according to Mike Ascione, a managing director at the firm, Berkshire’s first and second funds transferred the ADS ownership positions to Berkshire’s fifth and sixth vehicles. This allowed Berkshire to maintain its ownership long past the traditional private equity holding period and beyond the life of its first two funds.

The sale of the company, which is going to an undisclosed New York-based American Securities, followed the 2005 acquisition of Hancor Inc. by ADS, which today has over 3,000 employees. The buyer, it should be noted, is also considered a long term investor in the asset class, as it can control investments longer than traditional PE holding periods.

The investment, by all accounts, has been a success for Berkshire and the company. Berkshire’s first and second funds realized a 9x return on equity, while Berkshire’s subsequent investment translated into a 5x return for Funds V and VI.

In talking with Mergers & Acquisitions, Ascione describes that the growth profile of ADS is what drove Berkshire to hold the company for such a long time and continually re-invest over the past two decades. Initially, the thesis was about capturing the growth from a new product, the N-12 model of corrugated pipe, although the basis for the investment continually evolved as ADS moved into new end markets.

“Over the course of the 22 years, the future growth prospects continually provided the best opportunity for a return on capital than what we were seeing in the market… We were able to find liquidity on the way, but we never felt the pressure to have realize something fully, so we held onto it over time,” Ascione describes.

The transfer of ownership from fund to fund, however, is usually a difficult move to pull off. Berkshire had the benefit of a third party investor who was also exiting in 2002, which helped provide limited partners comfort that the transaction occurred at arms-length and at a market valuation. Moreover, Ascione describes that Berkshire employed a separate deal team to oversee the firm’s investment from its fifth and sixth funds.

Co-founders Richard Lubin and Christopher Clifford, along with managing director Kevin Callaghan, all worked on the initial investment, while Ascione, and fellow managing directors Ross Jones and Chris Hadley represented the new deal team.

In drawing parallels between the ADS and United BioSource exits, Ascione notes that in each instance management was a significant shareholder alongside Berkshire and ultimately drove the decision to sell.

Barclays Capital was hired by ADS as an advisor in the sale process.

For Berkshire, the sale represents the firm’s fifth realization this year, following the sales of United BioSource, Electro-Motive Diesel and American Tire Distributors. Berkshire also fully exited Bare Escentuals, which went public in 2006 and was sold to Shiseido for $1.7 billion earlier this year.