By Maureen Flanagan
Electrolux, the American icon of vacuum cleaners and floor care products, is regaining its luster. After years as a corporate orphan in the Sara Lee group, the company was acquired in April 1998 by the Dallas-based buyout firm Engles, Urso, Follmer (EUF). Three months after the deal closed, American Capital (NASDAQ Symbol "ACAS") bought $7.5 million of the company's subordinated debt from First Dominion Capital, which acted as EUF's agent in raising a tranche of the acquisition financing. Under the new ownership, Electrolux has made major strides by instituting cost controls, improving manufacturing processes, and revitalizing its sales organization -- giving a well-seasoned business a new shine.
Throughout its 74-year history, Electrolux has manufactured high-quality floor-cleaning products and has become a household name to a large portion of the American population. The company is one of the leading direct marketers of vacuums in the United States, offering a complete line of floor care equipment which includes upright vacuum cleaners, canister vacuums, carpet shampooers and a central vacuuming system. The products are known for their performance and durability. In fact, the company still supplies parts for 40-year old models, and units from the 1930's are in active use today. In 1998 Consumer Reports rated Electrolux uprights and canisters among the top models for reliability.
Electrolux first entered the market in 1924 with a cylinder-type machine imported from Sweden that was radically different from the upright sweepers available at the time. The company developed a strong direct distribution system to sell its products and by 1934 emerged as an industry sales leader. In 1968, Sara Lee purchased the company and owned it for almost 20 years. In 1987, seeking to divest itself of unrelated businesses, Sara Lee sold Electrolux to Wesray Capital, First Boston and the company's management.
Under Wesray's ownership, several strategies were implemented that negatively affected operations. These included selling its products in mass-market retail outlets and diversifying into the water purification business. The foray into the retail market was an unfortunate decision. Units were sold at cut-rate but competitive prices while the direct sales force tried to sell the same products at traditional margins. With retail undercutting its direct sales, Electrolux discounted the direct price, only to have profit margins evaporate. The water purification business also ran into problems and further eroded profits.
These difficulties resulted in a reorganization in 1990 in which Sara Lee and the lenders to Wesray took back control of the company. Under Sara Lee, the company stopped selling retail and returned to the direct distribution system that had proved to be a cornerstone of its earlier success. It also dropped the water purification business.
In 1998, EUF acquired Electrolux from Sara Lee, with First Dominion Capital raising a tranche of the acquisition financing and also making an equity investment. It was a match that suited EUF's portfolio. The Dallas-based buyout firm owned Interstate Engineering, another floor cleaning product manufacturer that operates on a direct sales basis similar to Electrolux. In fact, shortly after EUF's purchase of Interstate, Interstate recruited the former Electrolux Senior Vice President of Sales to its management team. (He is now an active member of the Board of Directors at his alma mater.)
When First Dominion Capital was looking for an investor to purchase part of the debt, American Capital moved quickly. With capital resources exceeding $150 million, American Capital is a buyout and specialty finance company that provides senior debt, subordinated debt and equity to middle market companies in need of capital for growth, acquisitions, employee buyouts, management buyouts, liquidity and restructurings. As of the Electrolux financing, American Capital has invested more than $97 million since its initial public offering in August 1997.
"As we saw it, here was the opportunity to invest in a quality brand name, with great potential for earnings growth under new, dedicated ownership," said American Capital Principal John Freal. "The American Capital investment in Electrolux - its first in the cleaning products industry -- reflects this confidence in the company and new owners."
Since the purchase by EUF, Electrolux has implemented comprehensive changes in its operations, resulting in significant cost reductions. The company will close its administrative offices in Atlanta, GA as well as streamline operations and improve automation in its manufacturing plants in Bristol, TN and Piney Flats, VA. It will also reduce the number of models it sells (currently 33) to make it easier for the sales force and more straightforward for the customer. The company is also working to re-implement an aggressive customer financing program that was dropped in the late 1980s.
The primary focus is on revitalizing the sales force by changing the commission structure and hiring new salespeople. The company has been long known for its successful direct sales operations. It now operates an exclusive direct sales network in the U.S. and Canada through 570 company branches which currently engage thousands of salespersons.
Joseph P. Urso, Chairman, President and CEO of Electrolux, stated that "We are very proud of our association with First Dominion and American Capital. Our philosophies are the same. The level of care, commitment and service displayed in our dealings together mirrors the levels of care, commitment and service that Electrolux is dedicated to providing to its customers and its people. We are confident that the Electrolux products and the Electrolux opportunity will continue to be the best in North America."
