Ste­fan Rabe on his new­est ven­ture

Coast2Coast, the pri­vate eq­uity group be­hind the list­ing of pharma firm As­cendis Health, has cre­ated an­other JSE-bound con­sumer goods group, Bounty Brands. Gi­uli­etta Talevi spoke to MD Ste­fan Rabe about his plans

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Q You don’t take kindly to the term “cob­bling to­gether”, but isn’t that what your pri­vate eq­uity backer has done in the cre­ation of Bounty Brands? A I guess it’s a nu­ance. We are buy­ing busi­nesses and putting them to­gether in some form of struc­ture. [But] we’ve al­ways prided our­selves on do­ing the re­search, un­der­stand­ing the mar­ket, pick­ing out tar­gets…

If you look at the un­der­ly­ing num­bers and the re­turns that the group as a whole de­liv­ers, th­ese are phe­nom­e­nal busi­nesses.

If one just looks at th­ese three busi­nesses [Bounty Wear, Bounty Home & Care and Bounty Food], it doesn’t look like there’s much in­ter­re­la­tion­ship. But you’ll see when we chat again in a cou­ple of months’ time; it will grad­u­ally make sense. The busi­nesses we’re look­ing to buy will start to fit in with each other. We’re not go­ing to the mar­ket with three dif­fer­ent things. We aim to take some­thing that has a clear strat­egy, a clear rea­son for ex­is­tence.

Q You’ve de­cided on the FMCG and fash­ion mar­ket as the one in which you’d like to play. Isn’t this a very dis­cre­tionary sec­tor of the econ­omy — shoes, cos­met­ics, home­wares? Why pick this sec­tor? A All the brands in those busi­nesses ap­peal to a broad mar­ket. If you look at Vans (the shoe brand), we sell a mil­lion pairs a year but we’re not in Edgars, say. If you look at the Cos­metix brand, it’s also young, across the colour spec­trum, also a broad mar­ket. Ta­ble Charm (the home­wares busi­ness) is fo­cused on the LSMs 4 and above, ru­ral, black mar­ket as well. Not all the brands will be like that; what we want to look at get­ting into the group is some­thing where we’re not re­stricted. We are look­ing at get­ting brands [from the first three busi­nesses] into other mar­kets, in SA or out­side SA’s bor­ders. The space avail­able to th­ese brands is still sig­nif­i­cant.

Q What is the home­wares brand all about? How big is it; how does it ac­tu­ally op­er­ate? A It’s a R200m-R250m busi­ness that we’re look­ing to dou­ble in the next three years. It dis­trib­utes and sells its brands to peo­ple who don’t have ac­cess to re­tail; where re­tail pen­e­tra­tion is quite low.

It sells qual­ity brands through a net­work of com­mis­sioned sales agents. They are fam­ily, friends, mem­bers of the same church. It makes use of that [net­work] to sell its prod­ucts out­side a nor­mal re­tail en­vi­ron­ment. So it’s quite an at­trac­tive chan­nel: you can cre­ate a brand, de­velop it, test it, all with­out the con­straints forced upon you by what would be a very large player in the mar­ket.

Ta­ble Charm has been around for 40 years; about 80% of its busi­ness is table­ware. We’re buy­ing [pots, pans, cut­lery etc] from the same sort of fac­to­ries that a [re­tailer like] Clicks would buy from, so the qual­ity’s no dif­fer­ent and the price point is no dif­fer­ent — it’s just that we are able to har­vest the mar­gins both from the whole­sale and re­tail [as­pects]. We have com­plete con­trol over what we sell, who we sell it to, what re­gion we sell it into, and that gives us flex­i­bil­ity.

Now we’re look­ing at adding colour cos­met­ics to the Ta­ble Charm range. We have a pur­pose in why we buy th­ese things — they have to work with each other — so that in a year or two, we’re no longer “cob­bling” but act­ing on a strat­egy.

It’s one of the rea­sons we’ve started dis­cussing [our busi­ness] with the press and oth­ers three years be­fore we want to list.

Q Is Ta­ble Charm a South African com­pany? I wouldn’t call it a house­hold name. A Ab­so­lutely. And there are a lot of those com­pa­nies out there, es­pe­cially in the di­rect sell­ing space.

It’s a poorly known mar­ket. Peo­ple think about Tup­per­ware, or Avon, Justine, and those sorts of busi­nesses. It de­pends on where you’re from. I grew up in Namibia so I knew some of those di­rect-sell­ing brands. If you grew up in Jo­han­nes­burg maybe you wouldn’t.

Ta­ble Charm has got a mas­sive sales force and sells to 430 000 peo­ple a year. Th­ese peo­ple are be­ing mar­keted to, shown the prod­uct; they can touch and feel it and smear it on and they all know who owns Ta­ble Charm prod­ucts in their area be­cause it’s a net­work.

Q Are there a lot of busi­nesses of a sim­i­lar ilk or size that have kept be­low the radar, out there for the buy­ing? Or are you look­ing to bring in over­seas brands and prod­ucts into your three

com­pa­nies?

A There aren’t that many — we don’t find them daily, but we man­age to find a good tar­get ev­ery cou­ple of weeks. Part of the strat­egy is that once you have some­one in your group who knows that part of the FMCG sec­tor well, be it ap­parel or cos­met­ics, they gen­er­ally know ev­ery­one; who’s good and who’s bad; and you then use those guys. And if they’re en­trepreneurs who have joined the group and had a pos­i­tive ex­pe­ri­ence, then you’ll drag that per­son into the room with the per­son you’re talk­ing to — we get that sort of cred­i­bil­ity quite early on.

We’re not just look­ing at lo­cal busi­nesses, we’ve started look­ing in­ter­na­tion­ally. Our African prin­ci­pal started in Fe­bru­ary and he’s go­ing to spend half his time in Africa look­ing for busi­nesses to buy. The ear­lier we start look­ing, the more frogs we kiss, the more princes we’re likely to find.

Q Your tar­get is am­bi­tious: R5bn in sales by the time you list, from R500m at the mo­ment. Is that achiev­able?

A It’s a com­bi­na­tion of the size of the mar­ket, the sec­tors we’re in­ter­ested in, the num­ber of op­por­tu­ni­ties in our pipe­line and the likely suc­cess rate. It would be a huge sur­prise if the com­pa­nies we’re cur­rently in due dili­gence with didn’t be­come part of the group. Any­thing could hap­pen, but even those will get us to R1bn, so by the end of March, turnover will be R1bn and that’s one year-end. If you’re look­ing at the growth of Ta­ble Charm, Vans and Cos­metix, you’re look­ing to prob­a­bly dou­ble that, at least, within the next three years. With­out even try­ing we should be about at R2bn from that base I’ve just talked about. There are some re­ally big busi­nesses that are in­de­pen­dent and have all kinds of rea­sons to talk to us.

You don’t find them through busi­ness bro­kers; they’re not dis­tressed [com­pa­nies]; they’re think­ing about it but they need that im­pe­tus, that cat­a­lyst. They won’t eas­ily sell [them­selves] with­out be­ing ap­proached by some­one who wants to buy.

Q Are you in­ter­ested in dis­tressed com­pa­nies that you be­lieve you could turn around?

A There’s no need to get in­volved there. Maybe there’s a small bolt-on brand that you can take out of a dis­tressed busi­ness, but we don’t re­ally want to worry about some­thing we have to turn around.

Q What cri­te­ria do you look for then in buy­ing up com­pa­nies?

A First and fore­most they need to have a sig­nif­i­cant mar­ket share al­ready. A leader or a leader in the mak­ing. Some­thing de­fen­si­ble. We need some­thing that we can in­vest in and help grow — we don’t re­ally want to make a brand.

Vans is ei­ther sec­ond to Con­verse or fourth, if you in­clude Adi­das and Nike. We’re build­ing on that so we’re spend­ing quite a lot of money this year. Cos­metix is num­ber one by vol­ume in Clicks, num­ber two at Dis-Chem, the Essence brand and Ca­trice be­ing a lit­tle bit smaller.

If you can’t build on it or if it’s a brand on the decline, you have to re­ally look at it hard.

Q Do you have the fi­nan­cial back­ing to go out and make all th­ese ac­qui­si­tions?

A Coast2Coast owns 100% of Bounty Brands, so its bal­ance sheet is at our dis­posal.

Ev­ery deal is slightly dif­fer­ent and there’s al­ways a por­tion of the shares that re­mains in the hands of the en­tre­pre­neur un­til list­ing — for many rea­sons; there’s man­age­ment con­trol of the busi­ness but they still have an eco­nomic in­ter­est and that’ll be­come Bounty shares on list­ing. We don’t want th­ese peo­ple to leave, or lose in­ter­est or mo­ti­va­tion, we want them to stay on board.

Most of th­ese busi­nesses, by virtue of how they grew over the years, are rel­a­tively debt-free. Of­ten in th­ese types of struc­tures peo­ple just gear the max out of any busi­nesses they buy and re­pay the debt us­ing cash flows, but we don’t like that.

Q What is Coast2Coast do­ing dif­fer­ently about the list­ing of Bounty Brands? For ex­am­ple, go­ing public three years be­fore go­ing to the JSE — is that some­thing As­cendis should have done?

A I don’t think the op­tion ex­isted at the time. Coast2Coast then didn’t have the bal­ance sheet it has now. The luxury of ap­point­ing an MD and an FD so early on to­gether with a team that will be in­volved in putting th­ese busi­nesses into some sort of struc­ture wasn’t open at the time [of the As­cendis list­ing]. Bounty has the size that’s in­ter­est­ing to in­vestors, ear­lier than As­cendis did, so the ac­qui­si­tions done by Coast2Coast, be­cause of the lack of funds at the time, were a lot smaller.

Es­tab­lish­ing a for­mal struc­ture much ear­lier on also al­lows us to over­come the ini­tial scep­ti­cism, I guess. We’re hop­ing to at­tract a much wider au­di­ence with the Bounty list­ing than we did with As­cendis. Rather have a longer pe­riod of scru­tiny so that by the time we go to mar­ket fewer peo­ple re­quire con­vinc­ing.

Ste­fan Rabe MD: Coast2Coast

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