Workers Borrow Against Retirement Fund, Buy 62% of Kirkhill

Employees of Kirkhill Aircraft Parts Co., borrowing against their retirement fund, have bought 62.4% of the privately held Brea aircraft parts distributor for $27 million, the company said Wednesday.

The company’s 53 employees bought the controlling interest from Kirkhill’s 30 shareholders through an Employee Stock Ownership Plan (ESOP) formed only a year ago, said John Mavredakis, managing director of Houlihan, Likey, Howard & Zukin Capital, a Los Angeles investment firm that put the deal together.

About two dozen of the original shareholders are now in their 60s, 70s and 80s and had been looking to sell their interests in the company so their estates will not contain assets that cannot easily be converted to cash, said Mavredakis and Henry Ray, the firm’s president.

“They only had three options,” Ray said. “They could have sold out individually and got something below value, or they could have sold to a third party, which they didn’t want to do because they wanted to protect their employees.”

The best way the owners could get a fair price and still leave the company “in the hands of those who built it up,” he said, was to sell most of it to employees.

Kirkhill’s employees are “delighted” with the deal, Ray said. No changes in operations or management are planned, he said.

Kirkhill is a small supplier of rubber and plastic products used in the interiors of all U.S.-made airplanes. Its annual sales are about $20 million, Mavredakis said.

The use of ESOPs to buy significant portions of firms has been growing in the last year, according to Mavredakis and other specialists in the field of mergers and acquisitions.

ESOP transactions involving 30% or more of a company generally yield a lower price than sellers could get in a sale to a third party, but the lower price comes with attractive tax benefits for sellers.

Figures gathered by the National Center for Employee Ownership show that about 9,000 ESOPs representing about 9 million employees exist nationwide. About 20% of them own a majority of the stock of the company that employs their members.

Louis Kelso of San Francisco is generally credited with inventing ESOPs, formerly known as Kelso plans, in the mid-1950s. Congress adopted the concept and gave it the ESOP name in legislation in 1974 and has been expanding and enhancing ESOPs ever since, said Michael S. Gordon, a partner in Kelso & Co.’s Newport Beach office.

The market for ESOP transactions, Gordon said, is ripe.

“We’re seeing more and more leveraged transactions with ESOPs,” Mavredakis said.

“Most of these companies are private and employ 50 to 500 people,” said Corey Rosen, executive director of the center.

For 1988, the center expects to record about 40 ESOP transactions of $10 million or more each and about 200 to 300 total ESOP transactions, he said.

The previous year, there were about 20 ESOP transactions of $10 million or more each and about 100 to 150 deals altogether, he said.

“So the pace has grown, and the tax and financial benefits are not the main reasons anymore,” he said.

Rosen said studies have shown that employee ownership and participation in corporate management and policy lead to increased productivity and higher performance.

He cited the latest 12-month results of Avis Inc., the car rental firm now owned by employees.

“Avis’ revenues grew 19% last year at a time when the industry’s revenues grew 6%,” he said. “And Avis also is paying off its debts three times faster than it anticipated.”

Some specialists in mergers and acquisitions are wary of ESOP transactions, especially leveraged ESOP transactions.

“I’m not in favor of using ESOP unless the deal would work without it,” said Richard M. Torre, president of Torwest Cos., an Irvine merger and acquisition firm.

“If you need an ESOP to make a deal work, you open yourself up to a significant amount of contingent liability,” he said. “And there appears to be an increasing amount of litigation, usually over the question of the company’s value, which determines the price to be paid. Since most of these deals involve private firms, everyone starts hiring appraisers to determine what the company is worth.”

The Geneva Corp. in Irvine, another merger and acquisition specialist, doesn’t get involved with ESOP transactions, said Arthur Perrone, the firm’s vice chairman. Besides concerns about valuation, he said, ESOP deals usually involve lower sale prices and less flexibility in structuring. Outright sales provide buyers with the best price and give sellers a greater range of financing vehicles, he said.