PE Deals of the Year
PAI Partners: Yoplait   Onex: Emergency Medical Services   Apollo: Hughes Communications   Silver Lake: Skype   El Paso   Castle-Harlan: Perkins & Marie Callender's   Midocean: Sbarro   Sun Capital: Friendly Ice Cream   Blackstone et al.: Travelport   Bain: Keystone Automotive  The year in PE bankruptcies  Other notable PE exits

In the rough and tumble world of auto parts, Keystone ­Automotive Operations Inc. was a roaring success at the start. As a family-owned distributor of specialty parts -- grill guards, spoilers, roof racks, superchargers and other parts that made cars faster and sleeker -- it staked an early lead in a highly fragmented industry. In 2006, it was nearly 5 times bigger than its next-largest competitor.

By then the Exeter, Pa.-based company had changed private equity owners twice, each seemingly on an adrenaline rush to take the company to a higher plane. When Bain Capital LLC bought it from Advent International Corp., Littlejohn & Co. LLC and General Electric Co.'s GE Commercial Finance in 2003 for $441 million, Keystone was well on its way to being a national player.

But the recession exposed two vulnerabilities: Keystone's products were discretionary items tied to economic cycles and consumer spending. It was also freighted with a substantial amount of debt that consumed cash flow, and debt maturities were looming.

In January 2011 Keystone agreed to an out-of-court restructuring that wiped out Bain's $179 million of equity.

One of several restructurings last year, Keystone's was noteworthy because the private equity owners prior to Bain made about 3 times their money. Aiming to extract more value, Bain's turn may have stretched the company beyond its limits.

"We had a business that was extremely profitable. We were making 15%, 16% margins," recalls co-founder Joe Amato, with a tinge of regret, though he and his co-founders were sufficiently enriched by the buyouts.

"They said they'd show us what they can do with it. It'll be magic," says Amato, commenting on the sponsors in general. "But what happened was, they just overburdened it. They layered on a corporate structure. We had five accountants; they put in 10 more. We had a very efficient, smooth-running business, but they tried to overengineer it."

His family founded the business in the '50s as an auto parts shop in Moosic, Pa. It grew to a 10-shop chain, became a wholesaler and then launched as Keystone Automotive Warehouse in 1972. "That business went crazy right out of the box," recalls Amato, a five-time National Hot Rod Association champion.

In 1998 the co-founders sold the business to Advent's group for about $200 million, retaining a minority stake. Advent installed new management. Distribution fanned out from the Northeast to the Southeast, Midwest and Canada. Ebitda went from about $30 million on $170 million of revenue to about $50 million to $60 million on more than $350 million of revenue in 2003.

Keystone's expansion under Bain brought it to the West Coast and Southwest. It made two acquisitions in 2005: Blacksmith Distributing Inc. in Elkhart, Ind., for $30 million, and then closest competitor Reliable Investments Inc. for $60 million.

Reliable, an Overland Park, Kan., auto supplier that also sold through call centers and catalogs, proved more difficult to integrate. "They bit off a little bit more than they could chew," says a source familiar with the situation.

Bain brought in another team led by CEO Edward Orzetti in 2006. Orzetti streamlined operations, cut costs and boosted productivity. But beginning in 2008, Keystone found itself squeezed by declining sales and debt payments.

At the time of restructuring, it had $186 million of secured term loans, $175 million of unsecured subordinated notes, a $48.3 million asset-backed loan and $4.4 million of undrawn letters of credit, according to Joshua Sussberg, a Kirkland & Ellis LLP partner who advised Keystone.

When all was said and done about a year later, Keystone had changed private equity hands a third time. Platinum Equity LLC took the wheel along with Littlejohn to help steer it back on course from a costly detour.

Stephen Zide

Stephen Zide, a managing director of Bain Capital LLC since 2001, headed the firm's involvement with Keystone Automotive Operations Inc., identifying it as "an extremely attractive" target. Zide has played a key role in other diverse investments, including Sensata Technologies Holding NV, a Netherlands maker of sensors and controls; phosphates maker Innophos Holdings Inc.; Edcon Holdings Pty. Ltd., a South African clothing retailer -- all successful deals -- and building materials supplier HD Supply Inc., which is still struggling with debt. Zide, in his early 50s, was trained as a lawyer, with a 1986 J.D. from Boston University School of Law and an M.B.A. from Harvard Business School. He was a partner at Kirkland & Ellis LLP before joining Bain as an associate in 1997. -- V.T.