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MY BIGGEST DEAL Genstar finds a fit among the ashes of housing’s collapse

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The slumping residential construction market is helping spur consolidation among downstream metal operations. For private equity firm Genstar Capital LLC, that spells one thing opportunity.

In April, the San Francisco-based company paid $228 million for International Aluminum Corp., a producer of residential and commercial building materials. The timing of the acquisition, which came in the midst of a 20-percent downturn in the residential building market in the first half of the year, was no accident, according to Genstar managing director Darren J. Gold.

"It was a good time in the cycle to buy," he said. "We believe in buying toward or at the bottom of a cycle and taking a long view with our portfolio companies. We're patient capital. We have the luxury of taking our time and working with our companies." Given that Genstar has held on to some of its acquisitions for as long as 12 years—although it sold others as soon as two years after buying them—it might well be in for the long haul.

Genstar saw International Aluminum as an undermanaged business in a sector with growth potential, Gold said. "We have a strong belief in the residential market, and companies going through tough times have tremendous potential. Our view of the residential sector is that we have hit bottom or near bottom, but the real question is, how long until it turns back up?"

Gold notes that 70 percent of International Aluminum's business is in the commercial building and construction market, which has flourished despite the residential downturn. "Building and construction is certainly not off on the commercial side, which has shown tremendous growth," he said.

Since taking control of Monterey, Calif.-based International Aluminum via a friendly buyout in April, Genstar has installed a new president and head of its extrusion business, as well as improving inventory management, customer service and manufacturing practices.

International Aluminum had revenue of $280.8 million in the fiscal year ended June 2006. The company, which employs about 1,600 people at 15 manufacturing facilities in North America, operates three main business lines. Its commercial division makes decorative entrance doors and store fronts; the residential division makes aluminum and vinyl windows and doors used mainly in remodeling and replacement applications; and the extrusion operations manufacture mill finish, anodized and painted aluminum products for both internal and external applications. The company is at least partially vertically integrated in that the extrusion division supplies the residential and commercial divisions.

Gold characterized the purchase of International Aluminum as a building products, rather than a commodity markets, play. The private equity company is already considering more acquisitions to expand its footprint in the building products sector, he said. "We are currently looking at a couple of complementary acquisitions for International."

While a focus on downstream aluminum assets could reduce exposure to commodity price risk, that does not mean Genstar is not interested in the wider metals business. But that interest might not be limited to the aluminum sector. "We've spent a little time looking at copper fabricators," Gold said.

As a former owner of Wolverine Tube Inc., a copper fabricator currently going through a restructuring, Genstar has prior expertise it can call on. "Wolverine was a very successful investment for us," Gold said. "We learned quite a bit about the copper industry."

Genstar divested its Wolverine stake in the mid-1990s and did not take any other interests in metals until the International Aluminum purchase, instead focusing primarily on such sectors as life sciences and health care services, industrial services, and business services and software.

But as upstream metal producers consolidate and shed more and more downstream operations, Genstar, which has $3 billion in committed capital under management, could be waiting to pounce. "With the consolidation among the majors and the potential for divestitures, we could be a buyer of choice," he said.

In a further indication of its interest in the metals business, the private equity player recently appointed George Haymaker, former chairman and chief executive officer of Kaiser Aluminum Corp., to its strategic advisory board. "He brings a whole host of experience in the aluminum business," Gold said. "International was a building products play, but we have a broader interest in metals, especially aluminum."

As the metals sector and downstream activities in particular continue to consolidate, Gold said Genstar believes there will be additional opportunities ahead. "There are still areas which are not consolidated or in which strategic buyers are not as logical. We normally buy companies within pretty fragmented industries so the companies can go out and make acquisitions themselves." This model could apply to International Aluminum, he added.

Genstar's latest fund is a $1.6-billion warchest targeted at, but not limited to, acquisitions in the $200-million to $400-million range. It plans to deploy the new capital over the next two to five years, noting that acquisitions can be opportunity driven. "Sometimes opportunities are more plentiful than others," Gold said. Any acquisitions are likely to have a North American focus, he added.

Flush with capital and the expertise of a former aluminum company chief, Genstar looks well positioned to take advantage of the restructuring in the aluminum industry if it so chooses.

"Private equity capital will continue to flow into every industry. Building products and metals are no exception," Gold said. "That makes it more necessary to have a unique perspective. Folks like Haymaker give us that perspective. We're always in the mode of adding great people to our team."


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