Middleby Corporation (MIDD): Case Study of an Intelligent Fanatic Led 100-Bagger

Ian Cassel Blog, Educational, Intelligent Fanatics 21 Comments

In 2001, Selim Bassoul became CEO of a $40 million market cap microcap called, Middleby Corporation (MIDD). He had joined Middleby in 1996 and turned around the company’s Southbend division, and in 1999 became COO to help turn the rest of the company around. In 2001, now the CEO, he had the weight of the entire company on his shoulders, but he was confident in his abilities, strategy, and the Middleby Brand.  He was so confident that he sold his brand new home so he could buy shares in Middleby and become the second largest shareholder in the company. Selim Bassoul, mentored by Jim Sinegal (Co-Founder of Costco), was an intelligent fanatic in the making.

Over the next 15 years, Selim Bassoul would transform Middleby Corporation from an unfocused, cultureless, slow moving, sleepy food equipment manufacturer into a compounding machine. Under Bassoul’s leadership Middleby Corporation’s revenues have grown from $101 million in 2001 to $1.8 billion in 2015, cash from operations has grown from $13.9 million to $249 million, net income has grown from $1.6 million to $191 million, while the amount of shares outstanding has remained relatively the same. Middleby shareholders have seen shares appreciate at a compounded annual return of 38.6% over the last 15 years (100+ Bagger).

MIDD Chart

All great companies started as small companies, and at some point most great companies were either founded or operated by an intelligent fanatic. As investors, we analyze the lives and businesses of known intelligent fanatics so we can better find the next one before others. Sean Iddings and I are working on the Intelligent Fanatics Project and we’ll be releasing our first book later this year. Sign up to our blog email list here on MicroCapClub, or visit IntelligentFanatics.com for updates. Lets now dive into the story of Selim Bassoul and Middleby Corporation.

Selim Bassouls’s Journey:

Selim was born in Lebanon and at the age of 12, and he remembers Beirut falling into civil war. His family was well connected in Lebanon and were “asset rich but cash poor”. During this time Selim remembers overhearing a conversation between his father and mother and his father saying, “I have only $20 left in my pocket. That’s all we have now. What am I going to do?”. It made a big impression on young Selim. “I knew in that moment I would never be poor,” Selim says.

Selim’s parents were very proud and honorable people, but times were tough. Salim was close to having to quit school to find work, but his parents refused to give up.

“I recall my mother shaking me by the shoulders and saying, ‘You will never work for anyone else,’” Selim says. “That had a big effect on me.”

Selim excelled as a student, achieving the highest grades in his class. He would attend the American University in Beirut, and then move to the US for post graduate studies at the Kellogg School of Management at Northwestern University. His parents had to sell a piece of land that was meant for their retirement to fund Selim’s college education.

“I will never forget the sacrifice they made. They sold the only asset they had left to send me to school. It shapes your personality and your ambition”, Selim said

One of the biggest lessons he learned at Northwestern was from a finance professor. “He said to me, ‘It doesn’t matter how rich you are, how financially solid you are, cash is king. You have to manage cash.’ I got that ingrained in me. We don’t run our company through net income, we run it through cash. Coming from a culture in the Middle East where cash is everything, it meant something to me. There was no borrowing to be had in during a civil war. It was all about cash.”

After graduation Selim would work for eight years in the healthcare industry for American Hospital Supply and Baxter Healthcare working a variety of positions. He then pivoted from Healthcare into Foodservice and worked for eight years for Premark Inc, as director of marketing of the cookchill division and then later as VP of Sales for the Vulcan cooking division.

Bassoul was aware of Middleby’s struggles but thought the company had significant potential. “It was a great brand,” he says. “They had done a wonderful job developing the revolving oven and automating the pizza business, but they had lost focus. They were no longer dealing with core competency. This was a huge challenge. Nobody lied to me. From the beginning, they told me, ‘Selim, we can’t guarantee where we’re going’, because they were struggling and they wanted me to be part of the turnaround.”

Soon after joining Middleby, Selim sold his house which he had just built to buy a large stake in Middleby Corporation’s stock. Selim bought shares and became the second largest stockholder of the company “when nobody was willing to invest in the company.”

Middleby Corporation Turnaround:

Middleby Marshall Oven Company was founded in 1888 and focused on manufacturing high quality custom ovens in the United States. Fast forward 100-Years and the company had diversified into many product categories in the diversified food equipment (DFE) manufacturing industry. The DFE industry can be cyclical, seasonal, and customer orders lumpy as new eating habits and trends take hold affecting quick-service and fast casual restaurant chains buying new equipment. DFE manufacturers need to stay lean and innovate to weather the low times and take advantage of the good times. By the second half of the 1990’s, consumer tastes were changing away from the normal pizza, hamburgers, fast food offerings, towards healthier alternatives. Middleby was caught in a down cycle with too many products in a declining market.

In 1996, Selim Bassoul joined Middleby tasked with turning around the Southbend division. Over the course of two years Bassoul turned the facility around and instituted the industry’s first “no quibble” guarantee. Any customer could return a product with a 100 percent refund within 90 days no questions asked. The “no quibble” guarantee was very powerful, “our market share sky-rocketed and pricing became a smaller factor in the buying decision”.

“I have a mentor called Jim Sinegal, the founder of CostCo. At CostCo you can return anything. So he taught me that the best way to improve your quality and your suppliers is to implement a no questions- asked return policy, because the customer will then tell you exactly how they felt about that product. We’re the only ones to do that in our industry now. The highest return I’ve done was $6 million. And we won the customer again, because we became better. Maybe that’s why we’ve been so blessed with the huge success we’ve had.”

In 1998, some misguided decisions led to the company triggering some debt covenants on its $20 million credit line. This forced the board to take a deep look into the company, its financials, and strategy. They didn’t like what they saw, so they called on Bassoul to move to Chicago to be Chief Operating Officer. Bassoul would use the same methods in turning the entire company around as he did at the Southbend division.

Middleby 1998-2002

When he looked at Middleby as a whole he saw a company with no focus or direction. The company had over 10,000 product lines and 1,064 employees. The company had expanded into product categories with low margins where they had no competitive advantage. Bassoul immediately got rid of over 5,000 products, shut down manufacturing lines, and reduced headcount by 200 employees. He refocused the company on the “the hot side of the business” which reduced the amount of vendors used and drove down raw material costs.

Bassoul then closed down the division headquarters for international operations and the US based international sales office relocating them into existing regional facilities. He also moved the corporate headquarters from a rather posh office building to office space within the Elgin manufacturing plant.

When Bassoul started, Middleby had close to 40% annual turnover of employees. Bassoul focused on rewarding and recognizing the achievements of employees and building corporate culture.  A profit sharing plan and bonus structure based on operating income was put in place for Middleby employees. Goals were posted each month with daily updates so employees knew exactly where they stood to reach a bonus threshold. In two years, employee turnover dropped below 10%. Bassoul also set up a system to where employees are asked to submit ideas for improving workplace performance and each idea is tracked for implementation and effectiveness. If an idea contributed to quality and productivity the employee would receive a $75 bonus. In the first two years the company received 1,728 suggestions, the company adopted 68% of them, with total cost savings of $850,000. Between 1998-2000 sales per employee rose 35%, reduced scrap and rework by 50%, and reduced system cycle time by 35%.

Our work force is our “greatest competitive weapon. They are the power that drives our company. World-class competitiveness requires the development of world-class human resources,” says Selim.

The next area of focus was product innovation and diversifying Middleby’s customer base. In 1998, 50% of the company’s sales were to Papa John’s, Pizza Hut, and Domino’s Pizza. Bassoul pushed his sales people to focus on smaller chains (150 or fewer stores) in the fast casual market like Panda Express, Jason’s Deli, etc. He also encouraged his sales and product development teams to work together and meet with these customers to develop new equipment that would work for their menus. From 1998-2001, Bassoul reduced the average time to market for new products from 36 months to 18 months. By 2001, the revenue base was smaller but the customer base was more diversified which put the company on more sound footing. Middleby designed a new pizza oven for Domino’s Pizza that cooked pizzas 25% faster and reduced electricity costs by 30%. They did the same thing for other large and small restaurant chains. Around this same time Bassoul rolled out his “no quibble” policy to all of the company’s customers.

“We changed our philosophy to be ‘customer driving’. We told the customer what they wanted and how much they would pay for our state of the art cooking technology. When there was a non-diverse customer base as there was in the late 1990’s, we were forced to be customer driven. When we diversified that base, we became customer driving. We walked away from situations that were not in our best interesting. Diversifying our customer base was key.”

In 2001, Selim Bassoul was promoted to CEO, and in 2004 would become Chairman of the Board. Selim focused on two things. First, there were seven layers of management, so he flattened the organizational chart. He wanted to reduce the bureaucracy and increase communication. Second, within months of becoming CEO, Bassoul proposed to the board to make an unsolicited bid for Blodgett Corporation, a company of similar size to Middleby. Shareholders and the board still had a bad taste in their mouth from a few failed acquisitions a decade earlier. Bassoul won them over through massive due diligence and an LOI from Bank of America to be lead lender on the deal. The Blodgett acquisition would further prove out Bassoul’s strategy and would be the first of many acquisitions.

Acquisition Strategy:

Middleby has made close to 50 acquisitions under Bassoul’s leadership, the biggest acquirer in the industry’s history. In 2013, Middleby acquired Viking Range for $380 million, and in 2015 acquired Rangemaster for $200 million. These acquisitions were used to roll out Middleby’s commercial oven technology into US, UK, and worldwide residential markets. In 2015 alone the company completed seven acquisitions. Many investors may view the frequency of Middleby acquisitions as being undisciplined or not well thought out, but they would be wrong. In a 2013 interview with The Motley Fool, Bassoul explains his acquisition strategy:

Gardner: Why have the acquisitions at Middleby succeeded? What is your checklist on making acquisitions? Because we know that there are CEOs that make acquisitions for a lot of reasons that might not be about long-term value creation, so why is it different at Middleby?

Bassoul: Well, I can tell you the reasons that we don’t make an acquisition. Growth, or size, or buying a market. So all those three reasons, we will not go after an acquisition to buy a market.

Gardner: And most people would think that, in fact I really don’t know where your answer is going here, so I’ll just say most people would think when an acquisition is going to happen, it’s about growth, size, or buying a market.

Bassoul: I think, Tom, there is a lot cheaper way to attack growth. I can discount my product and go after a market. I can go steal my competitor’s engineers and get some type of a product emulation. We buy a company because we believe that they have two things that are important to us. One, they have the ability to be already a brand and a patented technology, that is already disruptive. That will take us many, many years to get to.

Number two, the ability to buy it and retain the management so that that management allows us to basically, with some capital infused by us and some DNA from Middleby, whether it’s taking them internationally … is that in five years or less, would like to have the multiples of that acquisition translate into a price of five times multiple or less after the acquisition integration. Would like also to be accretive in no more than 18 months.

So let’s repeat the three things. One, it has to have a brand with a disruptive technology.

Gardner: That’s patented.

Bassoul: That’s patented. Number two, we need to be able to get within five years or less to a five times multiple or less after we realize the synergies and the integration benefits. Number three, it has to be accretive in 18 months or less.

Today, Middleby dominates their foodservice category. The company is #1 in Pizza Chains, #1 in Convenience Stores, #1 in Fast Casual, #1 in Deli Sandwich Shops, #1 in Steahouses and Seafood, #1 in Chicken Outlets, #1 in Pan-Asian Cousine, and #1 in Casual Dining. Basoul would say, if you are eating at McDonalds, Five Guys, Morton’s Steakhouse, Panera, PF Changs, Starbucks, Cracker Barrel, Subway, Pap Johns, and many others, your food was prepared on or in a Middleby product. The company also dominates specific product categories and are #1 or #2 in Fryers, Convection Ovens, Combi Ovens, Deck Ovens, Conveyer Ovens, Broilers, Ranges, Griddles, and many others. The company is now focusing on residential markets, and innovation in kitchen waste and water consumption.

Middleby 2011-2016

Someone asked Selim how he divides up his working day. He said 30% of his time is spent with customers, learning what they are interested in. “I don’t want to ever become what the horse and cart was to the automobile,” he says. Another 30% of his day is spent making sure his people are focused, properly incentivized, and have the right resources. “And that encompasses a lot of saying ‘no’. ‘No, we don’t need to do this’. ‘No, you don’t need to hire that individual.’” The next 30% is focused on finding and driving innovation at Middleby. Bassoul says, “Nobody told Steve Jobs ‘you need to create an iPhone or an iPod’.” The last 10% of his day is spent in prayer. Selim is a Christian and spends two hours a day in the morning and evening asking God for guidance and purpose to lead his life and company in the right direction.

Middleby’s success is a direct result of strategies put into place by its intelligent fanatic CEO, Selim Bassoul. I think you will enjoy the video below from December 2014, where Selim Bassoul tells his story at the Baron Funds Investment Conference.

In addition to annual filings, I used the following sources for quotes and information:
Leading Corporate Renewal: Selim Bassoul at Middleby Corporation, Kellogg School of Management
Titans of Industry: Selim Bassoul
Middleby Chases Fame in the Kitchen
The Middleby Corporation Case Study
Middleby’s CEO on How to Make Successful Acquisitions

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Comments 21

  1. Thanks Ian. This was an excellent, inspiring, and instructional article that will make any investor or entrepreneur better!

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      Thanks Ryan. I started diving into the story this past weekend and couldn’t stop. Selim illustrates many attributes that are common in most intelligent fanatics.

  2. Ian, thanks for the informative and punchy article.

    You refer to Tom Gardner at Motley Fool. I recall he recommended Middleby several times during 2005 (I think it was that year) for his ‘Hidden Gems’ newsletter. Clearly he recognised Mr Bassoul’s talents back then, and the stock appears to have since ten-bagged judging by the chart.

    However, to get close to the 100-bagger…

    …I just wonder if, with the benefit of hindsight, whether anyone could have spotted the MIDD opportunity any earlier?

    Mr Bassoul was appointed CEO in 2001 — was it obvious then (or even pre-2005) that the traits of an ‘intelligent fanatic’ were apparent…at least to an investor doing some ‘surface’ research?

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      Sean Iddings and I are writing a book that will be coming out later this year. In it we evaluate several intelligent fanatics from difference industries, different countries, and different eras that started and built companies that lasted for decades. All of them deployed similar strategies to building their organizations that you could have picked up on early if you were willing to do the necessary qualitative due diligence. How early? I’m not sure, but with MIDD you could have certainly spotted the signs in the early 2000’s.

  3. Ian I was there at that Baron annual conference and saw him speak he was memorable and impressive. Thought he was a standout not just from that conference but out of many CEOs that I have seen over the years (no position in the stock- except I do own some of the Barron’s mutual fund).

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  4. Super read Ian.
    MIDD was always that perplexing company for me. I have followed it off and on for about 7 years but didn’t look into the details.
    I simply didn’t like their “acquisition” method for growth.

    Shows how much I know about the person behind it. One of the very few gems and minds who made it work, as opposed to all the countless failures.

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      Jae:

      As investors we are naturally hardened by the fact that 70% of acquisitions destroy shareholder value, and likely even greater in the microcap space where capital deployment is even more paramount to success. The interesting thing is that many of the microcaps (the few actually) that made it from microcap to small-mid cap had rather robust but disciplined acquisition strategies. I think the big difference is in the success stories and in Middleby’s case too is it had a cash flowing business where a great capital allocator (CEO) could use debt to fund smart acquisitions without diluting shareholders too much. I’m glad you enjoyed the article.

  5. Thanks for profiling this Ian. I invested in MIDD and made (from memory) a 25% total return before selling. (not quite a 100 bagger) I can’t remember why I sold, but I did remember the CEO. His passion was obvious and stood out.

    There is another CEO that comes to mind that seems to fit the description- Robin Raina of Ebix.

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  6. Thanks Ian, I remember him from one of my classes doing my Kellogg MBA. Fantastic story, great for you to share it.

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      1. I go to the conference annually, and its one I try not to miss. In 2015, the lead CEO speaker was Elon Musk. Most years they have at least 1 CEO intelligent fanatic as speaker annually- other past speakers have been Kevin Plank from Under Armor, and Steve Wynn from Wynn Resorts.

  7. Thanks for the excellent article Ian. I was fortunate enough to relate to this article doing a ton of research of pizza equipment and many of said that Middlby Marshall is the “heartbeat” of the pizza industry and has been very several years. We use their ovens in our restaurants and they run like a champ. I love how he sold his beautiful house that he just built to buy enough stock to be the #2 largest shareholder. Looking forward to reading your Intelligent Fanatics book!

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  8. Superb post Ian and looking forward eagerly to read your book…

    I will add few more points. It looks like Bassoul has made intelligent use of float and debt to finance various acquisition. Earnings was not enough to finance all the acquisition and if he had not made intelligent use of debt and float . Infact float increased at 19% CAGR over 2001-15 compared to debt which increased at 16% CAGR..

    2) In hindsight atleast, it was possible for a quantitative focused guy like me to have a serious look at the company even during 2003-06 as company was generating pre-tax RoA of 16-17%

    Here is the excel working for same… https://onedrive.live.com/redir?resid=628D60485A569210!8437&authkey=!AK2C6y58UA_IKYA&ithint=file%2cxlsx

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      Anil, thank you for the kind remarks and for the excel spreadsheet. The irony is I normally pass on acquisition focused companies and ones with debt, but many of the big winners have intelligent fanatics that are great allocators and are masters as using both M&A and debt very effectively.

  9. Hey Ian. Great case study! This post got me thinking more about acquisition and I still can’t figure it out, so I would like to just ask you: How the heck do you know when an acquisition will work out or not? What do you look for when a company makes acquisitions?

    I know companies like WFCF made several small acquisitions along the way, but I find making small acquisitions are not as serious as large ones and the parent company is less likely to overpay. And some acquisitions sounds great in theory like when IVFH acquired the Fresh Diet. Even if IVFH did not overpay for TFD, it would’ve still been a bad acquisition if they kept throwing good money after bad. Good thing management recognized the problem.

    So yeah, my question is basically, what do you look at when a company makes an acquisition to determine whether it’ll work out or not?

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      Will, this would probably make for a good blog post.

      In general the reason many microcap acquisitions fail is the acquired company either isn’t a good business, the price paid is too high, and/or the structure (mainly when it’s equity) used hurts common shareholders (too dilutive).

      I’ll try to write on this subject in detail later this year.

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