by Maureen Flanagan
With consolidation increasing in the electrical services industry, Constar International, Inc. faced a big decision. Either it could sell out to one of the many companies that were interested in buying the highly productive provider of commercial custom-built electrical and telecommunications networking services. Or it could stay independent by finding a larger financial partner and grow and develop on its own. Constar's top-flight management team had a winning strategy for success and confidence in its future business plan -- so they chose to stay independent. In 1998, Constar teamed with Celerity Partners, a private equity fund based in California, to put together a group of investors to re-capitalize the company. As part of this transaction, American Capital Strategies (Nasdaq:ACAS) invested $16 million in subordinated debt with warrants and $500,000 in common stock.
Constar had good reason to remain independent. Established in 1976 by Stephen Bisson, its CEO, Constar has developed two successful businesses, an electrical services group and a networking group, to become a nationally known company and industry leader in New England. The company uses a design and build approach to design, integrate, and install electrical and networking systems for a diversified customer base. The two groups are separate business segments, but strategically complement each other - with the well-established electrical services cross-marketed to customers for high value networking services. This strategy and superior project management give Constar a competitive advantage over many firms in the industry and have made the company highly profitable. Even during an industry recession in New England in the early 1990s, the company made money and continued to grow.
From its headquarters in Norwood, Mass., Constar has expanded to five offices nationwide, employing some 325 non-union technicians who are licensed to perform electrical contracting in 26 states. To support its services, Constar established an in-house certified apprentice training program, now in its fourteenth year, and also conducts one of six national licensing programs for the building industry's professional telecommunications and networking association. Constar's technicians are certified to deploy and warranty products from 60 manufacturers including Lucent Technologies, AMP, Cisco Systems, Consulting Services International, 3Com, Seicor, and Ortronics.
Recent projects include designing and installing the telecommunications and computer networking systems at Staples corporate facility and rebuilding the electrical systems at the Malden Mills textile plant in Massachusetts. The company also recently designed and installed the computer networks at the Foxwoods casino complex in Connecticut and at leading universities such as Yale University, Boston University, and the University of Connecticut.
American Capital's investment in Constar originated from a recommendation from its partners in Electrolux LLC. (In 1998, American Capital provided $7.5 million in sub-debt financing in the acquisition of Electrolux.) "Our partners in Electrolux must have been pleased with our service and level of funding for them to refer Constar to us," said American Capital Principal John Freal. "In making its decision to invest in Constar, American Capital was impressed with the company's consistent track record of growth and tremendous client base that is the result of the ability to successfully design and implement its products," said Freal.
American Capital President Malon Wilkus noted that "Constar is another example of our ability to invest in companies that are industry leaders and have strong management teams." American Capital invests $3 million to $20 million in middle-market companies in need of capital for growth, acquisitions, ESOP buyouts, management buyouts, liquidity and restructurings. Constar is its first financing in the electrical services industry and put American Capital's investments at $155 million since its IPO in August 1997. As with many of its other financings, American Capital owns an equity stake in Constar.
American Capital's investment in Constar is supported by the equity sponsorship of Celerity Partners, a Silicon Valley buyout group with $50 million under management. Celerity has a track record of making acquisitions and expanding the companies through additional transactions. First Dominion Capital provided senior debt and also invested in the equity.
Constar's CEO Stephen Bisson is pleased to have American Capital on its team. "Constar needs growth-oriented financial partners to support us so that we can take advantage of the many opportunities we see in this industry," he said. Constar will continue to expand its business by cross-marketing its electrical and networking services. It plans to open new regional offices in the Southeast, Mid-Atlantic and Midwest and make selected acquisitions in targeted markets. The company will also strengthen ties to and forge new strategic relationships with equipment manufacturers. Further growth opportunities lie in expanding service contracts with its larger customers, such as Stop & Shop and Bread and Circus.
The market timing of the Constar acquisition is ideal. Although analysts project slow growth in the electrical services industry, fragmentation of the market provides an excellent opportunity for growth through acquisitions. The same expansion is true in the fast growing networking and telecommunications markets, driven by the need for high quality cabling systems and continual systems enhancement necessitated by rapidly changing technology. The fragmented structure of the industry and its historically regional focus allow ample opportunity for consolidation -- a part of Constar's future plan.
Constar is confident it can emerge as a significant force in the industry. It offers a national, single source solution for its customers' electrical, telecommunications and computer networking requirements -- one of the broadest ranges of services in the industry. Customers value this comprehensive capability which leads to more efficient project coordination and fewer job modifications. As a result, projects are completed on time at lower cost. (In fact, 99% of Constar's projects -- which last from two weeks to one year and generate revenue from $10,000 to $15,000,000 - are completed ahead of schedule.) By using its own personnel, trained in-house, the company can ensure consistency and quality service. The company's size, multiple locations and competitive pricing ability make Constar a strong contender to assume a leading position in the industry.
