DEAL NOTES SF-FILTER

A pure play investment

To secure its latest investment, Equistone needed to employ patience and knowledge of the local terrain, Roman E. Hegglin tells PLATFORM.

APRIL 2023

EQUISTONE'S ZURICH-BASED deal-hunters had been patiently tracking SF-Filter for six years before finally securing the buyout of this Swiss filtration business in September 2022.

Equistone initially approached the business back in 2015, with a buyout offer that reflected certain organisational challenges it had identified. Instead, the company was acquired by rival investment firm.

By early 2022, Equistone judged SF-Filter to have become the consolidation platform that it had hoped it would be. And they pounced.

“We proactively reached out to Ambienta when we heard it might be coming to market,” says Roman E. Hegglin, Equistone investment director. “We wanted to qualify ourselves as the right buyer for the business, and Ambienta quickly saw we knew a lot about what they had originally bought and what they had achieved.”

Roger Manges (COO), Christoph Jenni (CFO) and Daniel Infanger (CEO) outside SF-Filter's headquarters.

We wanted to qualify ourselves as the right buyer for the business, and Ambienta quickly saw we knew a lot about what they had originally bought and what they had achieved.

Equistone entered a formal process run by investment bank Robert W. Baird & Co, and the deal team met with the company’s new management team several times in Zurich, where both were based, and were “extremely impressed.” The team rigorously challenged the management plan, but rather than weak points, they found a strong growth story with downside protection.

“This allowed us to achieve the conviction that it was a business capable of becoming an international champion,” said Roman.

The filtration market has annual growth rates of between 4-5%. Even during downturns, filters have to be replaced, to avoid damage.

Market dynamics

As well as being an attractive asset going into a downturn, SF-Filter caters to many growing end-markets, such as mid- to heavy-duty commercial vehicles, agricultural and construction machinery, manufacturing processes, production lines, machines and robotics, and HVAC and water purification. The investment case projected growth of c.7% per annum, notably higher than the sector overall.

In addition, as machine applications have increased in complexity, so have their filtration requirements and the replacement frequency cycle. The company’s filters are considered indispensable and include industrial and mobile applications.

The filters also have an important role in health and safety. “Filters protect equipment, processes and the environment,” says Roman. “There is the environmental and social element of protecting our planet and population and the company is working on various ESG initiatives to improve these features further.” This aspect is further underpinned by growing regulations to ensure workplaces such as vehicle cabins and factories have minimum standards of air quality.

The business also has a local presence in Germany, Austria, Poland and France, allowing it to serve more than 90% of its customers, within 24 hours, in a 600km radius.

SF-Filter is among the leading players in the fragmented market for filtration distribution . It has a very large and diversified product portfolio, allowing it to serve as a ‘one-stop-shop’ to its 27,000 customers, with a churn rate in mid-single digits. It has a specialist salesforce with technical know-how and long average tenure, who are versed in OEM/OES filters as well as premium private labels. Meanwhile, the wider market consists of much smaller distributors.

“This represents a big opportunity for consolidation,” says Roman.

Filtering opportunities

Fulfilling that potential will require the right management team, which Equistone believes is in place, but also the processes – especially IT systems – to help scale. It must also invest in efficient warehousing capabilities as a prerequisite to maintaining the broad portfolio of products that will act as a barrier to entry.

SF-Filter’s growth to date has been organic and so embarking on an acquisition programme will represent a new challenge for the management team. Given its experience and international footprint, the Equistone team is well placed to play an important role in advising and supporting this process.

The main geographical targets are Germany, Austria, Switzerland, Poland and France, with the main focus for add-ons in the near-term being the DACH region, although not exclusively. “Germany is still the market that is most fragmented in this area,” says Roman. “We also believe this business is the most sophisticated player in the market, so it is well placed to take market share from smaller distributors, particularly in Germany. Also, with our DACH/NL team approach, we have a big network for doing M&A transactions in these regions.”

Another key area of operational improvement is pricing. The business has “a huge product catalogue” of thousands of SKUs, so an improvement to pricing strategy is another important lever that can be pulled.

We also believe this business is the most sophisticated player in the market, so it is well placed to take market share from smaller distributors, particularly in Germany. Also, with our DACH/NL team approach, we have a big network for doing M&A transactions in these regions.

SF-Filter's headquarters in Bachenbülach, Switzerland

Deal execution

Equistone's Stefan Maser and David Zahnd.

As the team closed in, during the summer of 2022, raising acquisition debt on attractive terms turned out to be straightforward, relative to the strained conditions across much of Europe. “It was a secondary buyout, and as a Swiss company it was well known in the lending community in Switzerland. We had various lenders keen to finance the deal.”

Indeed, the transaction has been a distinctly Swiss affair. The management team is based in Switzerland, close to Zurich where Equistone has a long-established office. Roman, who has spent his entire professional life in the market, joined Equistone in 2016 from Credit Suisse Investment Banking, where he was already aware of SF-Filter as part of his broader M&A universe. “There are quite some cultural differences in the Swiss market and being able to accommodate these is a real advantage when doing a deal in Switzerland.” Roman was joined on the deal team by David Zahnd, also based in Zurich, and Stefan Maser. ☐

A full version of this article appeared in PLATFORM 08, Winter 2022/23