October 1, 2012
Interviewed by: David Snow
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Brynwood’s Zestfully Good Deal

Zest soap and VO5 shampoo were orphaned brands before being acquired and revived by private equity firm Brynwood Partners. As told by Brynwood’s Joan McCabe, revitalizing these brands included a focused WalMart strategy and a NASCAR sponsorship with a winning racer.

In the third in a four-part Privcap series on private equity success in the consumer sector, McCabe is joined by Michael J. Grossman of RSM and Timothy Mayhew of Fenway Partners to discuss extracting value, no matter where a product is in its lifecycle.

Zest soap and VO5 shampoo were orphaned brands before being acquired and revived by private equity firm Brynwood Partners. As told by Brynwood’s Joan McCabe, revitalizing these brands included a focused WalMart strategy and a NASCAR sponsorship with a winning racer.

In the third in a four-part Privcap series on private equity success in the consumer sector, McCabe is joined by Michael J. Grossman of RSM and Timothy Mayhew of Fenway Partners to discuss extracting value, no matter where a product is in its lifecycle.

Brynwood’s Zestfully Good Deal

David Snow, Privcap:

We are joined today by Michael Grossman of RSM, Joan McCabe of Brynwood Partners, and Tim Mayhew of Fenway Partners. Welcome all to Privcap today. Thank you for joining us.

Joan, we’d like to hear your story of a recent investment that you did that went very well. You have some show and tell today, right? Let’s see these products.

Joan McCabe, Brynwood Partners:

Thanks, Dave. Where you sit depends on where you stand. We tend to go look back instead of forward. And so, over the past year, we’ve done a roll up of orphan brands that we purchased from larger corporations. And two basic brands are Zest soap.

Thisisa business that you may recall, it’s been around for 50 years- zestfully clean. And then VO5, which was bought from Unilever. Both of these brands were brands that had been under-managed, not because they were bad brands.

But in the case of Zest, Proctor & Gamble, large global company, wanted to spend their time and energy on global brands– this is a US brand– and on now female and male segmentation. So evolving more up the ladder rather than down the ladder towards private label and the value consumer. And we had the opportunity to buy that in January 2011.

No surprise, nobody was working on it. They had no brand managers, we bought it without people. And the key assessment was similar to what you’re saying, sales were declining and assessing the gross margin. What was that sustainable gross margin in a declining sales level? And how do you change the strategy of the business?

We basically changed the pricing. Procter & Gamble had raised prices. It did not increase the sales, decreased it, because in the great recession, people were trading down to a $0.99 price point. So we took the price down. We changed out the manufacturer. They had outsourced manufacturing but to a former P&G plant. And so, ironically, we saved money in our cost of goods sold.

That’s an interesting fact that we’re asked a lot by our limited partners. Well, how can you make something more cheaply or be more efficient than Procter & Gamble? Well we–

Timothy Mayhew, Fenway Parnters:

It’s focus. It’s because you focused.

McCabe: It’s like we try harder, that old adage. We have 100% of our time and energy on one SKU, not on 30 brands. This is the last thing that came out of the bag of a Proctor & Gamble salesman, not because it was a bad brand, but just because he was spending his time on Old Spice and Oil of Olay. And then we were fortunate.

About six months after we purchased Zest, Unilever purchased a publicly-traded company called Alberto Culver. And Unilever already had a significant competitor in the value shampoo business. So the Justice Department forced them to divest the VO5 brand in the United States. And we were fortunate to be able to buy it at an opportune price.

Same story- didn’t buy any people. And they had manufactured internally, and we bought it and outsourced it. And in VO5 we sell 100 million bottles of shampoo. That’s a lot of volume. So we were able to get better pricing through outsourcing. And also, you don’t have that fixed overhead when you have your manufacturing plant.

You mentioned, Tim, that you had divested your manufacturing plant. I bet you had the same issue where you have fixed overhead and a lot of different things working on. So this is an outsource model, 26 employees. We do about $250 million in revenues. So, our keys to success is really focus, focus, focus. We spend a lot of time on those distribution customers, Walmart, Dollar General, Kroger.

Mayhew: Were these in Walmart before you bought them?

McCabe: They were having difficulty in Walmart. And so, in both these cases, we have an office that Brynwood has that is in Bentonville and deals with Walmart. So what we did was we did special packing and special promotions. And, in a way, kind of what you did, we partnered with Walmart. And we’ll make something for Walmart.

Most retailers want a unique SKU. And think about it, a big company that’s focusing on a different brand, it’s going to do one run of one soap. And that’s it. You want it, you got it. It’s sort of like Ford, you want that Model T, you get it. What we did was we said, well, what do you want? Well in this case, this is a little different. It’s called the family size.

You know how everything’s XL now. Everybody buys XL, everyone’s bigger. Well, we do an XL. No brain science to that. We also put the Zest soap on NASCAR.

So car number 17, we bought for NASCAR races because that’s our target demographic. And, ironically, it’s funny. For those of you that are NASCAR fans, Matt Kenseth was the guy that we contracted with. And guess what happened? He won the first race. It was pretty cool.

Snow: Is that your value ad right there?

Mayhew: You can pick them. That must’ve been the first significant advertising that Zest had gotten in awhile.

McCabe: I would say in decades.

Mayhew: But you had great brand awareness to reawaken.

McCabe: Yes and you’re kind of reawakening, that’s a good word, Tim. So we’re only two years, less than two years, into it. And since that time, we bought a brand from Henkel called CO Soap. It’s also a value brand. And then we bought another shampoo brand called White Rain that we closed about a month ago, another value shampoo brand.

Mayhew: Who are you building the business for? Whom might you sell this business to?

McCabe: Well, that’s a great question because we– you’d said you exit to a strategic. I’m not sure we’re going to sell this business to a strategic because a couple of things. We’ll buy a divided brand, P&G, and we’ll work with a strategic on what they want. P &G wanted to keep the Zest brand in Mexico because it’s the number one brand.

Most people would say, I’m not doing that. I want to have the universal brand. We said, fine, we’re a US-focused fund. So they own Mexico, we own the US. It’s not a license. We won’t do license properties. VO5, they had to divest the US, not Europe. So Unilever owns Europe. So we have– we’re very happy doing divided brands.

Going back to our first acquisition, we had a brand called Aqua Velva and Brylcreem. We own the US rights, and Sara Lee Douwe Egberts own the European rights. We sold that business for seven times our money. And we sold it to a private United States business called Combe.

So we’re comfortable with it, but I would say you’re exactly right. We would probably expect this would go to a private equity firm that then want to take it from maybe, $300 million to a billion. We take it from kindergarten to high school and then we look at somebody to take it to college.

Mayhew: Somebody like- you could have taken it and sold to Prestige or something like that and then they could go-

McCabe: Yeah. Yeah. We had a business called Richelieu Foods, which was private label pizza, and we sold it to Centerview, Jim Kilts. And Jim Kilts and his team are going to build it. They have an aggressive growth plan, but at least we built out the infrastructure for them. We’ve given them a good basis that they can build on.

Grossman: Sounds like you got a pretty good match here, where you may be able to exit to Fenway Partners.

McCabe: We’ll talk later.

Mayhew: I need you for diligence. You got to help me on the gross margin analysis.

Grossman: It’s funny you mention gross margin because I was going to ask you. You dropped the price point on Zest and then obviously you reshuffled your cost of goods sold. You got a new plant. I’m curious what happened to the– how many points the margin moved because of that.

McCabe: Well, it’s a good question. We improved the gross margin. We will buy businesses without an audit. So guys like you are key. We do quality of earnings and assess the gross margin. And we rely on our experts to diligence it, and then work from there. But we’ll, usually, just like you said, Tim, we’ll usually have a plan for how we’re going to improve the gross margin, or we’ll at least know what we have to do to fix it.

Snow: Final question for Michael. How is this indicative of broader trends that you’re seeing across the consumer landscape, and the ways that GPs are seeing opportunities to transform businesses?

Grossman: Well, we’re seeing a lot of situations where private equity groups are getting companies or divisions of publicly-traded companies. Kind of like you talked about where P&G didn’t really want the US-based brand Zest anymore. And that’s kind of one of the trends that we’re really seeing because these orphaned companies, maybe they’re not focused on it.

Management would come with it. Obviously, you get them to roll some equity or give them a piece of the equity. And you get a real good opportunity there. I think that’s one of the major trends that we’re seeing right now. We’ve seen just a huge increase, I’d say, of the carve-out type deals that we’re doing. I’d say they probably tripled in last year.

What is a major deal-flow trend you are seeing in the consumer sector?

Grossman: We see a little bit more minority interest deals. I guess this kind of started back in ’09 when there weren’t really a lot of deals going on that you had some consumer focus, private equity groups looking at minority interest deals. You had companies that didn’t necessarily want to sell 100% or 80% of their business, but yet they needed some working capital, growth equity. And so they were able to get those deals done.

What services does RSM offer to private equity firms?

Grossman: Well, in private equity, we’ve got a lot of experience. And so, not only me personally, I’m on the transaction advisory. So we do buy-side due diligence and sell-side due diligence. But we also do tax structuring, M&A tax advice. Technology is a big piece of our business, and so we have a whole consulting practice built around technology and other areas of performance improvement. And, of course, there’s also the portfolio audits, as well as the audits of the fund.

In performing due diligence on a consumer-facing business, what numbers are of particular importance?

Grossman: Margins are very important to our private equity clients. And it’s amazing, in the middle market, you really need to understand what you’re doing, what you’re looking at, to make sure that those margins are appropriate.

Do you mostly perform buy-side due diligence?

Grossman: We see a little bit more in the sell-side. We primarily did buy-side due diligence. We still do, but we are trending towards sell-side. We used to probably do 80% buy-side, 20% sell-side, and now it’s more like 60/40.

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