Dry composite sliding bearings producer -Blind Profile

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Arkios Italy

Sliding Bearings Producer – Blind Profile

Transaction Outline

Our Client is a global Manufacturer in the Dry Composite Sliding Bearings market for applications both in Light

Mechanics and Oil & Gas, where it is one of the main 5 global players, thanks to its Worldwide presence in:

Europe (2 Manufacturing Sites in Italy + 1 Commercial in Germany), North America (2 Manufacturing Sites in US,

near Chicago), South America (2 Manufacturing Sites in Brasil) and India (1 Manufacturing Site). Consolidated

revenues for the Group are € 22 Mio, with Ebitda around 10%

The client entrusts us with the task of seeking a strategic partner who may be able to join the entrepreneur in the

group growth, through a Capital injection in order to accelerate the internationalisation process already started.

The Company needs some growing capital, in order to overcome shortness of liquidity (caused by a bank

restructuring debt at the Parent Company’s level in Italy in spring 2012), and in order to finance its Net Working

Capital.

From an economic point of view the business is performing well, but the shortage of financial resources al the

Parent Company’s level in Italy, is undermining Group’s ability to growth.

The Company

The Group, composed by a Holding which controls 3 Italian operational companies, 3 production subsidiaries in

US, Brazil and India, as well as sale branches in US and Germany, is among the top 10 players specialised in the

Rubbing Bearings sector, and among the top 5 global players (of which 2 Italian) in the Composite Dry Sliding

Bearings segment.

The Group was born in 1986. Thanks to the continuous research and innovation of product and to the capability in

developing new and innovative solutions ad hoc for new markets, the Group successfully became one of main

global players in the Sliding Bearing (or Bushings) niche, and in particular in the Composite Dry Sliding Bearing

segment, part of the wider market of Bearings (bearings in general, including ball bearings). The Sliding Bearings

100% 100% 100% 100% 100% 100% 100%

100%

Special Contract

Work

Operational 3

(Italy)

Holding

Production

South America(Brasil)

Commercial

Germany(Germany)

Commercial

North America(United States)

Commercialization

for North America

Production

North America(United States)

Production

South-East Asia(India)

Production &

Commercialization

Europe

Production Oil & Gas

Segment

Production for North

America

Production &

Commercialization

for South-East Asia

Production &

Commercialization

for South-America

Commercialization

for Germany

Production 1

(Italy)

Production 2

(Italy)

* Dry Composite bushings are dry sliding plain bearings intended for radially loaded bearing arrangements and require a minimum of radial space. They permit oscillating or rotational movement. They are appropriate for all applications where freedom from maintenance is required or where lubricant starvation can occur

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Arkios Italy

are used in the most varied industries, like: Renewable Energies, Oil & Gas [which represents 25% of its sales in

valves/actuators], Light Mechanics (food & beverage, packaging machines, sealing and welding machines,

hydraulic pumps, machine tools), Heavy Mechanics (transmission tools, heavy equipment, etc.), Automotive and

Agricultural Machines.

With more than 220 employees all over the world and a

consolidated turnover of €21 million in 2011, today the

Group is the only Italian player in the sector, with

competitors mainly German and US, in a market which is

in continuous evolution, where the factors like the

technological research, the customisation, the capability

of offering very high solutions in short time, as well as

the availability of a varied stock, are the success drivers.

The structure of the Group, meets a precise requirement

of the market and it is composed as follows:

Production unit Italy 1

o Production and sale of “standard” and special Dry Composite Bearings for the European

and Italian market.

o Production of semi finished products (so-called straps), thanks to its own production technologies, for the production of bearings in the subsidiaries in USA, Brazil and India.

Production unit Italy 2

o Production and sale of special bearings and slewing rings (Dry Composite Stainless Steel) for clients from the Oil Gas and Renewable Energies sectors.

o Production upon request of special components, generally in composite Stainless

Steel/Nickel-Chrome Inconell-625/Teflon in few pieces (up to 5-10 pieces) with large dimensions.

Production unit US

o Production and sale of “standard” and special Dry Composite bearings in North America for the American and Canadian Market.

o The Company – with the exception of productions for the Oil & Gas market – imports the semi finished product (strap) from Italy and executes the ending phase of the process.

o The segment Oil & Gas, between the US production branch and that commercial one, counts for circa 20% of sales.

Production unit India

o It operates in the Dry Composite segment, where it is one of 2 producers directly present in India and South East Asia (competitor of Saint Gobain). Today, the South East Asia produces Bimetal only, now a commodity

o In the Valve (Oil & Gas) segment, which represents 30% of turnover, all the production circle is local.

o All the new line of Polymer Bearings (see below) is produced in Brazil

o In the Mechanics and Automotive segment, which is growing and requiring innovation, there is the need of producing integrally in loco (starting directly from the raw material, no more from the semi-finished product), therefore strong investments are necessary.

Production unit Brazil

o As for the Production US, it produces and sells for the South America market.

Germany Commercial Branch: it is the commercial branch for the distribution in the North European markets

and in particular Germany

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Arkios Italy

USA Commercial Branch: it is the commercial branch which joins the Operational unit USA, due to a different

type of clients (distributors) and direct clients of Oil & Gas.

Furthermore, the Group controls another Operational company, active in a synergic sector as sandblasting, zinc

coating and Teflon coating of different components.

The goal of the Business Plan elaborated by the Group is to have Operational units in USA, Brazil and India which

may be able to produce starting from raw materials (no more from semi finished products), in order to be quicker

in the development of orders/products, to save significant costs of transportation and duties, as well as to be

more independent, especially in Brazil and India which are countries with more potentialities of future

development. For this end, the Group needs additional investments to those already done in last years.

Main Economics

The Company has registered a Turnover of aprox. €21

million in 2011 (+30% vs 2010) and EBITDA of 12%, equal to

€2.3 Mio.

The banks debt (aprox. 40% of sales) are in line with the Net

Working Capital.

The cash flow has been mainly used to finance the

development of the subsidiaries abroad.

The Company has invested on average 3-5% of sales per

year in R&D costs, counting them for the reference year

without capitalising them. Therefore, according to more

correct accounting principles, EBITDA would be higher.

In the EBITDA calculation leasing fees are not separated (ex

IAS 17), penalizing the real EBITDA (or EBITDAL).

(/000 €) 2009 2010 2011 30/6/12 CAGR

Fatt Cons. 15,500 17,000 21,000 11,000 + 19%

EBITDA -400 2700 2250 1.250

Ebitda % -3% 17% 12% 12%

Equity 3,500 3,900 4,200 4,900

Abstract Group Competitive Positioning (see below “Key Investment Rational”)

The Group has a significant competitive positioning in the growing segment of Dry Composite Sliding Bearings,

which has 5-6 competitors in the world, in a Market with strong entry barriers due to Know-How of production

and process, investments in Plants and in R&D, as well as capability of continuous innovation in rapid times, in

order to meet new needs of the market.

Its positioning is consolidated by the International presence in 4 continents, with production subsidiaries

independent from the point of view of production and sale, in Europe, North America, South America and South

East Asia.

Furthermore, the Group is the global leader for know-how and clients in the Oil & Gas sector, which is a sector

rapidly growing with large margins.

Hence, it is a Player – today still with small dimensions - in Europe and US as global leader in the niche of Oil &

Gas market (Valves and Actuators), with great opportunities of development thanks to new applications and

materials that the market requires, and to a policy of continuous research and development in order to meet the

requirements of the market which is rapidly growing, like (additional to that one of Oil & Gas) the market of light

mechanics, packaging, Food & Beverage etc.

-5.000

0

5.000

10.000

15.000

20.000

25.000

2009 2010 2011

15.500 17.000

21.000

-400

2.700 2.250

Sales Ebitda

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Arkios Italy

Products and Applications

Products The Group is able to produce any kind of sliding bearings (cylindrical, conical, flanged and slewing bearings) made of Composite Material (Bimetal + PTFE), Carbon/Glass Fibre, and Polymer, including – sector leader – Polymer for technologically advanced applications and upon request, with large dimensions (also for 5-10 pieces) and as well as with large margins for the Oil & Gas industry and the Renewable Energies market.

Hence, the Group works on technologically advanced products, differentiating itself in the niche of special products, in composite (market value €800-900 Mio) and on specific products upon request.

Here below an example of products and their applications:

Composite Bearings (Bimetal + Modified Teflon)

Self-lubricated

Dry Sliding Bearings in 3 layers of composite material: (A) Coil

[inox/bronze/alloy steel/carbon steel/etc] + (B) sintered bronze

powder + (C) Teflon Lubrication is not needed, because it is

guaranteed by the internal layer of modified Teflon

o Stainless Steel - Carbon Steel - Bronze o Sintered Bronze - Sintered Bronze - Sintered Bronze o PTFE Modified - PTFE Modified - PTFE Modified

Composite Bearings (Bimetal+Acetal Polymer)

Pre-lubricated

As explained before. The internal indentations are useful to release

pre-loaded lubricant

Appropriate for all applications which require bigger friction in harsh

environment (heavy equipment, agriculture, etc)

- Water-repellent (no swelling) - Wide range of operating temperature

o Stainless Steel - Carbon Steel - Bronze ------------------------ -----Sintered Bronze----------------------------- --------------------------- Acetal Co-Polymer --------------------------

Composite Bearings in Fiber

Dry sliding bearings, in Fiber [Glass Fibres, Carbon Fibres] coated of

Teflon fibres.

Appropriate for Special Applications, in technologically advanced

sectors in Light Mechanics.

- Excellent resistance to corrosive media, even to salt water - Good insulator preventing passage of electric current

------------------- Glass Fibres/Carbon Fibres ---------------------- -------------------------------Epoxy Resin ------------------------------- ------------------------------ PTFE Fibres --------------------------------

Bearings upon request with Special Treatments

Dry sliding bearings in Stainless Steel/Inconnell-625, with special

treatments anti-friction with special PTFE film.

Appropriate for special applications with high/low temperature (Oil

& Gas) and resistance to chemical corrosion (Food & Beverage).

- Suitable for application with temperature (–188°C / +538°C) - High chemical corrosion resistance and compatibility with fluids

--------------------- Nickel-Chrome Inconell-625 --------------------- ------------Special anti-friction treatment (Special PTFE) ---------

Special Net Bearings

Bearings made of metal net, created thanks to a particular process

with application of modified PTFE film

----------------------- PTFE Modified Belt --------------------------- -------------- Stretched grid in Bronze or Steel --------------------

Polymer Bearings

Bearings in thermoplastic material and composite fibres,

characterised by lightness, duration and cheapness.

Particularly suitable for applications of Light Mechanics (Food &

Beverage, packaging machines, sealing and welding machines,

machines tools).

- Underwater applications/Low moisture absorption

- Minimized wear and excellent service life

- chemical resistance

---------------------- Thermoplastic material ---------------------- -------------------------- Solid lubricants ---------------------------- ------------------------------- Fibres ------------------------------------

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Arkios Italy

The product – suitable for very different contexts – is a technologically high product, subject to continuous

innovation and new usages, and it requires a production process extremely complex, where know-how and

patents represent a key success factor; hence, in order to maintain the technologic leadership in the niche where

it is active, the Group bore significant investments, in particular in the production of the semifinished product.

Applications

Here below some possible usages of the product:

Valves Actuators Windpwer Hydroelectric Packaging Machines Food & Beverage

Food Processing Sealing Machines Machine tools Power Transm. Presse Idrauliche HeavyEquipment Automotive

The Market

The Sliding Bearings (or Bushings) market is estimated to be worth circa € 1.5-2 billion (with circa 8-10 players in

the world); such a market is a segment of the wider Bearing market which would have achieved a dimension of

€34/37 billion1.

40% of the demand comes from the Industrial sector: (A) Light Industry: food & beverage, packaging machines,

sealing and welding machines, hydraulic pumps, machine tools, textile machines, etc…); (B) Heavy Industry: heavy

equipment, power transmission tools, aviation industry, construction equipment, presses, etc.) and (C) Oil and Gas,

Renewable Energies and Aerospace, this sector is rapidly growing with high margins.

30% comes from the Automotive sector (historical sector). The remaining 30% from distributors, which

intermediate in their turn this part of the production for 75% of their total to the industrial market.

World Bearings Market Report (Freedonia) estimates an annual growth of 8% for the global demand of Bearings,

despite the downturn of the Automotive market, just thanks to the new applications and technological innovation

for new applications, in sectors with strong growth. This growth will be particularly pushed by the Emerging

Economies: India (+17% in 2001), Brazil (+8%) and China, especially for the traditional Automotive market and

Heavy Mechanics markets, while in Europe and US the growth will be driven by the Packaging, Food & Beverage,

Light Mechanics, in addition to the Energy sector (Oil & Gas and Renewable Energies).

Furthermore, the Sliding Bearings sector is characterised by important niches with high margins.

In particular the Sliding Bearings market is distinguished by players operating in 2 very different segments:

(A) Bimetal [carbon steel/bronze powder]

Such segment of Bimetal is now a commodity, with low added value, where the most part of players are concentrated.

(B) Composite (so-called “Dry Composite Bushing”): steel/sintered bronze powder/modified Teflon.

The Composite segment (Market Value equal to circa €600-800 Mio) has few players (5-6) among which our client, since continuous

investments in R&D and a consolidated know-how are needed.

A further segmentation has Sliding Bearings producer with (A) standard production only operating in the historical

Automotive market and Distributor market, and (B) a limited number of producers who produce products ad hoc

and non-standard for the sophisticated market of Oil & Gas. Our client actually is the only one in the world for

this market and in particular for the big producers of Valves and Actuators (all of them are its clients).

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Arkios Italy

Investment Rationales

Here below the possible rationales for an investor in order to value this opportunity:

Market

Growing market/niche: the segment where the Group operates (Dry Composite Sliding Bearings) is growing,

thanks to the demand of new application in growing markets (Oil & Gas, Packaging Machinery, etc)

o , the segment Dry Composite (market value circa €600-800 Mio) is a “Niche”, growing and strongly

concentrated among 5-6 competitors,

o Market with strong entry barriers, due to production and process Know-How, investments in Plants and R&D,

capability of continuous innovation in rapid times, in order to meet new needs of the market.

New applications demand with high technological content and in new materials: Composite Fibers, Polymers,

Special Treatments for Food & Beverage, Packaging, Light Mechanics and Oil & Gas [valves/actuators]

o Growing markets, like Food & Beverage, Packaging, as well as Oil & Gas (Valves, Actuators) and Energy, require

innovative solutions with high technological content;

o The undifferentiated market of Bimetal, now a commodity, is linked to few applications with little added value,

while Composite will substitute Bimetal;

o The Market, due to cost/logistics problems, requires more and more the production of such components in

loco, especially in the emerging countries like China, India and South East Asia, Brazil and South America, with

a clear advantage for those producers who are already present in these markets in terms of both production

and sale. It is clear that the possibility to move part of production in loco may be a differentiating and

competitive factor.

Differentiation of producers for target market

The players, historically developed to supply the Automotive market (Historical market), are differentiated and

specialised for product categories and target markets:

o The main multinationals like SKF, INA-Schaeffler, Glyco-Federal Mogul, Saint Gobain are mainly competing in

the segment of “standard” Composite for Automotive, Nautical and Heavy Equipment.

o The sector of “standard” products requires capability of having wide variety, great financial capability in order

to maintain the stock

o The segment applications for the Oil & Gas sector (Valves, Actuators, etc) requires customisation, reply timing,

production flexibility and capability of developing ad hoc solutions; today the market has only 3 players in the

world, one of which is the Target company.

o As for new materials, also here, different players are specialising on special applications

Company

International presence in 4 continents: Europe, North America, South America, India with abroad production

subsidiaries.

o The Group is present in US (2006), India (2006), Brazil (2006), with 3 factories which supply local clients and/or

local multinational branches who require the production according to local standards.

o The production subsidiaries have their own clients, with their own commercial structure and they are

independent, excluding the supply/purchase of the semifinished product (which is the part with added value,

where know-how and investments are needed) which is produced in Italy and elaborated in loco

o Hence, the Target Company has a commercial structure now consolidated and has already placed for 5 years a

“flag” in the strategic countries, where the Subsidiaries have interesting growth rates of sales.

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Arkios Italy

o Besides, the Group has 2 additional branches abroad, in Germany and US:

Global leader for know-how and clients in the Oil & Gas sector: Player – today still with small dimensions - in

Europe and US as global leader in the niche of Oil & Gas market (Valves and Actuators)

o The Target Company is indeed the global leader in the niche of applications for the Oil & Gas sector, thanks to

its know-how and to consolidated relationship with the main producer groups of valves and actuators

(Cameron Valves, Valvitalia, Valbart, Flow Control Technologies, OMS, Air Torque, ATV, Virgo, etc…)

o The big corporations of the Sliding Bearings market (SKF, INA Schaeffler Group, Glyco-Federal Mogul, Saint

Gobain), concentrated on standard products, are not present in the specific niche of Oil & Gas, since they are

not able to entry in this market which needs customization, reply timing, production flexibility (the standard

market instead requires the capability of having wide products variety, financial capability in order to

maintain the stock, not the flexibility and capability of developing new ad hoc solutions.

o Non-replicable know-how is proved. There are other 2 players operating in this niche, all over the world.

Vertical Integration: one of 5-6 players vertically integrated, with know-how to produce the semi finished

product

o The big corporations are NOT vertically integrated and do not produce starting from Raw Materials, but

by buying the semi finished product on the market. (so-called Strap), which represents – in terms of

added value – the strategic component.

o The semi finished production represents a strategic barrier to entry for competitors in the Oil & Gas

segment, because it allows to develop ad hoc solutions for valve producers, with products according to

particular specifications and standards requested by clients in this sector.

o Know-how and investments done for the production of semifinished products are not easily replicable

and represent the main asset of the Target Company.

o The capability of producing ad hoc solutions also in Inox Steel represents an additional distinguishing

feature of the Company

Production flexibility, high quality and service to the Client: sales are well distributed between “standard”

production (Automotive, Heavy Equipment, traditional mechanics) and tailor-made production with high added

value

o Production flexibility: capability of exploiting as best the production capability, distributing the

production between standard Bearings (from the prospective of service, in stock), semi-standard ones

and special ones, these latter upon request of clients (orders), also for very little quantity (5-10 pieces)

o Quality: the Group has always collaborated with clients in the design of the production plants in order to

supply them the best product (quality, resistance, etc). The Group can count on its own internal

department of quality control, where each product is tested in extreme conditions and the test results are

shared with the clients.

For further information about this transaction, please contact

Paolo Cirani Alberto Della Ricca Andrea Rossotti

Partner Partner Senior Analyst

+39 335.68.40.737

[email protected]

www.arkios.it

+39 347.22.03.181

[email protected]

www.arkios.it

+39 339.86.98.674

[email protected]

www.arkios.it