Business Description:

Rauch Acquisition Corporation currently owns the majority of the stock in Rauch Industries, Inc.

Rauch designs and distributes Christmas ornaments through mass retailers such as Target. The ornament industry has $400 million of sales and has been growing at a rate of over 4% per year for each of the past three years.

Transaction Background:
Founded by the Rauch Family in 1952, Rauch was purchased in 1996 by Syratech Corporation, a $350 million tabletop giftware corporation. Syratech was subsequently purchased in 1996 by Thomas H. Lee Corporation, a multi-billion dollar private equity firm.

Syratech suffered from excess leverage and deteriorating financial performance and has been restructuring for the past several years. Syratech identified Rauch as a non-core business and hired CIBC to sell the company in late 2002. Due to Rauch being an underperforming business, the auction was unsuccessful. Blackstreet began negotiations to purchase the company in June 2003 and concluded the transaction 10 months later.

Investment Thesis:
As a non-core division of a large, financially distressed corporation, Rauch suffered from a lack of corporate attention. Despite a growing market, Rauch has experienced declining sales and poor operating margins. Milestone believed that a change of senior leadership was required to fix the business and upon closing immediately replaced the top officers of the company. The company also suffered from inflated expenses and poor marketing and product development. Blackstreet believed that through a combination of cost cuts and better merchandising that the company could be very profitable. Furthermore, with a focused, entrepreneurial management team, the company could capture its share of the growing ornament market.