Financial Mail - Investors Monthly
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
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.