Dura, Shiloh takeovers had one man in common

The auto industry is on fire and John Stewart is standing by, prepared to extinguish and salvage parts of it.

Stewart, a former manager at Toyota's big auto assembly plant in Georgetown, Ky., has been quietly buying up distressed plants and companies over the past few years as a private equity investor with a strategy.

Last week, Stewart struck boldly: Grouper Holdings, a subsidiary of the investment company he co-founded, MiddleGround Capital, stepped in with $218 million in cash to buy the assets of Shiloh Industries of Valley City, Ohio. Shiloh is a multi-factory mainstay of U.S. metal stamping, aluminum parts and carbon fiber that has been making a name marketing itself as a "supplier of lightweighting."

"I've been watching Shiloh for years as an investor," Stewart told Automotive News last week.

Stewart made his play on Aug. 30 when Shiloh — notably, a General Motors and Tesla supplier that has been beaten down by the coronavirus pandemic and was swimming in $575 million in debt — filed for Chapter 11 bankruptcy protection.

He blamed Shiloh's predicament on acquisitions and mergers paid for with debt. The resulting loss of liquidity is a common struggle around the auto parts manufacturing world these days, especially after the pandemic shutdown drained many suppliers of cash reserves.

That's a bad situation for suppliers — but it's an opportunity for Stewart.

"Unfortunately, a lot of people in the industry have done the same thing. And this is what we think is just the beginning of many of these types of transactions that we're going to see over the next six, 18 months."

Only four weeks earlier, Stewart and his investment firm also stepped in to buy control of Dura Automotive, another established U.S. supplier that had worked itself into financial straits.

After evaluating more than 1,000 potential businesses, MiddleGround acquired 75 percent ownership of Dura, the Auburn Hills, Mich.-based supplier of driver control systems, lightweight metal vehicle frames and battery trays, which filed for Chapter 11 bankruptcy in October 2019.

MiddleGround funded the transaction 100 percent with equity, invested more than $60 million in cash to Dura's balance sheet and closed the deal with Dura holding less than $20 million in debt, Stewart said — "unheard of" for a company with $572 million in North American automaker parts sales in 2018, he added.
Stewart, 51, left Toyota in 2007 after 18 years, having started as an hourly line worker in Kentucky.

He joined the New York private equity fund Monomoy Capital Partners as an operating partner that year, became partner in 2016 and then co-founded MiddleGround in 2018. The company is based in Lexington, Ky., where a number of Toyota alumni are involved.

Stewart said there are four trends he and his partners are monitoring as they decide where to make additional acquisitions, and all of them pertain not to the old world of metal-bending and internal combustion but to the future: powertrain electrification, vehicle lightweighting, connected vehicles and autonomous vehicles.

By 2024, he forecasts, 60 percent of Dura's revenue will come from electrification, largely as a result of Dura's contract to manufacture battery trays for a major automaker — a $250 million expenditure over the next five years.

"If you can make investments in the supply chain and the infrastructure of the industry in the areas that have exposure to these four trends, even on a pre-COVID basis, we were seeing opportunities to have between 9 and 16 percent compounded annual growth rate," Stewart said.

In the past few months, MiddleGround assembled an advisory panel of leaders in the automotive industry to help inform its decisions.

MiddleGround has invested in other companies, including precision machining company Alco Manufacturing, metal processing and distribution company Banner Industries and fabrication and welding company Steel Craft Corp.

"We really care about the capital structure for these businesses," Stewart said. "We're not corporate raiders.

"We're not people that are going to try to jack up the prices of their parts and just trying to make a quick buck and then leave the company in distress with a lot of debt," he added. "That's just not what we do."

Stewart said that both Dura and Shiloh are strong operations with good-performing factories, for the most part.

But he acknowledged that working for a company that is going through a bankruptcy, as is the case for both Dura and Shiloh, takes a toll on the business, its management and employees.

"We want to get things back to normal," he said. "We want to pay our vendors. We want the employees to come to work and not have to worry about where their pay is going to come from."