Case studies

privateequityinternational.com
FOR THE WORLD’S PRIVATE EQUITY MARKETS
DEAL mECHANIC
A collection of case studies detailing the
operational value creation story behind some
of the industry’s most successful deals.

private equity international
1
In 2006, Modern Dairy built its first farm
in the eastern Chinese province ofAn’hui,
with the intention of raising dairy cows
and selling raw milk to branded dairy com-
panies for processing into various dairy
products.
China’s demand for dairy consumption
had been growing rapidly for the previous
two decades, but an underdeveloped raw
milk supply chain – which was comprised
of millions of individual farmers – had led
to milk safety issues and quality risks.This
culminated in the huge tainted milk scandal
of July 2008, when six babies were killed
and a further 294,000 reportedly taken ill.
The cause was proved to be contamination
by the industrial chemical melamine,which
was eventually traced back to former Chi-
nese dairy products company Sanlu.
So there was clearly substantial demand
for a large-scale dairy operation to provide
safe,high-quality milk – but a lot of opera-
tional challenges to overcome too.This was
the context in which Kohlberg Kravis Rob-
erts chose to enter the Chinese dairy sector:
between 2008 and 2009,the firm invested
a total of about $150 million of equity in
Modern Dairy.
The results have been impressive.Today,
it’s the largest dairy farming facility in China,
both in terms of herd size and (according
to the China Dairy Association) raw milk
production,churning out 1.8 million tones
of milk per year. Between 2008 and 2011,
top line revenue at the Chinese dairy farm-
ing company grew 393 percent to RMB
1.4 billion (€172 million; $222 million),
while EBITDA rose 520 percent to RMB
459 million. More recently, the company
reported that net profits for the 12-month
period ending 30 June 2012 were RMB 396
million, a 77 percent increase.
What’s more, this bottom line growth
hasn’t come from cutting costs and shrink-
ing employee numbers, as in many big
buyouts; under KKR’s ownership, Modern
Dairy has seen employee headcount more
than double, from 1500 at the time of
investment to roughly 3250.
While KKR has yet to fully realise its
investment in Modern Dairy,the firm looks
poised to generate a very healthy return.In
2010, KKR took the company public on
the Hong Kong Stock Exchange alongside
China-focused CDH Investments, raising
$448 million. The firm sold 222 million
shares in the IPO, roughly one third of its
original investment,and received $79 mil-
lion in proceeds.
Much of Modern Dairy’s growth is
directly related to operational changes
spearheaded by KKR Capstone, KKR’s
in-house team dedicated to improving the
operations of portfolio companies. The
group spent 16 months working intensively
alongside Modern Dairy’s management
team. It then dialled down its involvement
slightly for a period,to somewhere between
nine and 13 days per month – but since July
2012 it has been back with the company full
time,spending somewhere between 14 and
19 days per month with management. So
what have been their key initiatives?
1Building out management
One of the first things KKR did
to spur growth at Modern Dairy
was to help the company recruit
key organisational positions it needed to
improve operations.
“KKR’s partnering with the founders
of Modern Dairy to enhance manage-
ment capability and build a sustainable
managerial platform to drive operational
Deal
mechanic
Under the
bonnet of
a recent
deal
Milk money
During the past four years,
Kohlberg Kravis Roberts
has turned Chinese
portfolio company
Modern Dairy into a cash
cow thanks to a series
of operational initiatives.
Graham Winfrey reports
The system has
transformed
how Modern
Dairy manages its
business and has
fundamentally
improved management
effectiveness across the
board
DEAL MECHANIC

private equity international 2
We helped to
ensure there
was a quality
control process in place
to ensure that the cows
were fed the best quality
feed to help them
produce milk safely and
efficiently
deal mechanic
improvement were the bedrock to having
Modern Dairy become the business it
has become,” says Julian Wolhardt, KKR’s
regional leader of China, who was named
non-executive chairman of Modern Dairy
in September.
In fact, this amounted to a substantial
overhaul of the management team. “This
included enhancing the already solid man-
agement team of Modern Dairy by helping
them find a chief operations officer, chief
nutritional advisor,head of purchasing,and
head of breeding, among other positions,”
he tells PEI.KKR also worked with manage-
ment to implement training and succes-
sion plans for important functions such as
farm heads and functional center heads,to
improve the sharing of knowledge.
Along with the expanded management
team, KKR also established a more robust
and numbers-driven management system:
they worked to identify the key perform-
ance indicators that highlighted the most
valuable operating metrics,and established
a process by which they would be reviewed
on a monthly basis.They also revamped the
company’s budget review and reporting
system, which is linked to the compensa-
tion and incentive plans of all members of
the management team.
“The system has transformed how
Modern Dairy manages its business and has
fundamentally improved management effec-
tiveness across the board,” saysWolhardt.
2Improving best practice
While enhancing business per-
formance using tried and tested
methods of operational improve-
ment is something all private equity firms
with operations teams strive to accom-
plish, few have had to deal with the unique
set of challenges that come with having
to use live cows to produce their core
product.
In order to address the company’s health
and safety risks – which, not surprisingly,
was a hot topic in the wake of the tainted
milk scandal – KKR helped Modern Dairy
set up an outside advisory board and imple-
mented stricter standard operating proce-
dures for disease prevention and food safety.
This has had tangible effects: it helped
Modern Dairy reduce milk bacteria count
by 80 percent,to approximately 0.5 percent
of the China national standard.
KKR Capstone and Modern Dairy also
developed standard operating procedures
for all aspects of dairy farm operations,such
as breeding, nutrition and purchasing.The
procedures increased single-cow produc-
tivity – i.e. the amount of milk it’s able to
extract from a single cow – and allowed
Modern Dairy to expand rapidly by rolling
out its operating and managerial models in
new markets.
“KKR and Modern Dairy worked
together to improve the performance of
key functional areas by implementing best
practices across all farms to increase milk
productivity,” says Wolhardt. “As a result,
since KKR’s investment,Modern Dairy has
increased milk yield by 34 percent.”
3Feeding growth
As you’d expect, animal feed is a
big deal when you’re dealing with
this many cows. ››
Modern Dairy: bringing milk to the masses

private equity international3
“The quality of the cows’feed deter-
mines the quality of the milk they produce”,
says Xiaoyu Xia,head of KKR Capstone for
China. “We helped to ensure there was a
quality control process in place to ensure
that the cows were fed the best quality
feed to help them produce milk safely and
efficiently.”
KKR Capstone helped design a stand-
ard feed planning and procurement process,
plus‘feed optimisation tools’that identified
costs savings. As a second step, the team
developed a process that included demand
planning, contract negotiation with local
providers of the corn silage used to feed
Modern Dairy’s cows,land and yield inspec-
tion and harvesting planning.
Despite KKR Capstone’s many talents,
optimising cow feed was slightly beyond its
field of expertise.So to improve these tech-
nical functions,it sought external expertise
from outside the firm:for example,in order
to increase the quality and quantity of corn
silage, it worked with a well-known silage
production expert fromAustralia.
All feed purchasing managers, at head-
quarters and in every single Modern Dairy
farm,now use exactly the same process and
tools on a daily basis.This helped Modern
Dairy reduce costs by 3 percent and drove
an estimated 4 percent increase in EBITDA
in 2010.
Afterimplementingthislonglistofopera-
tional improvements, Modern Dairy’s cows
were producing at a rate at least 40 percent
higher than the average farm in China, and
with much better quality, according to Xia.
Management incentives and risk miti-
gation initiatives have also helped Modern
Dairy maintain an incident-free record of
providing safe milk to consumers.
“The quality of the milk from Modern
Dairy is far better than that of other daily
producers in China and even exceeds the
standards in Europe and the US in terms
of higher protein levels and lower bacteria
counts,” Xia adds.
4Strategic partnerships
In order to preserve and ensure
further growth,KKR helped the
company secure insurance cover-
age for Modern Dairy’s most essential asset
– its dairy cows.
It’s also been advising the company on
strategic acquisitions and partnerships.This
included a 10-year agreement with Meng-
niu Dairy, the leading branded milk player
in China,to ensure 100 percent up-take of
Modern Dairy’s production.This also opens
up another interesting angle:a possible exit
route. According to newspaper reports in
August this year, Mengniu Dairy was said
to be mulling a takeover of Modern Dairy,
although the company has thus far denied
that it is in talks to be sold.
KKR also helped Modern Dairy to build
on its banking relationships: this helped it
improve its working capital management
and secure long-term bank loans,which will
support new farm expansion and develop-
ment projects.At the time of KKR’s original
investment, the company had four farms;
now it has 20,with an additional two under
construction.
Lastly,as is usual with KKR’s investments
these days, the Capstone team instigated
some cost-saving environmental initiatives:
Modern Dairy managed to reduce electric-
ity and water usage on a per cow basis by at
least 10 percent and increase its utilisation
of bio-gas electricity generation.
****
As China’s raw milk industry continues to
consolidate – individual farmers still supply
about 95 percent of China’s raw milk,com-
pared to roughly 50 percent in the United
States,for example – Modern Dairy is plan-
ning to develop new products to generate
revenue from a broader customer base,
according to KKR.
The firm says it’s currently transitioning
from providing day-to-day operational sup-
port to Modern Dairy to“ongoing counsel”.
But that doesn’t mean it’s finished on the
operational improvement front: future
projects in the pipeline include a second
wave of feed purchasing optimisation initia-
tives, to achieve further cost savings and a
collaboration with the chairman and chief
executive officer to develop an organisa-
tional blueprint for long-term growth.
So it seems that private equity and cows
have a lot in common:continuous nourish-
ment is the best recipe for generating a
strong return.
deal mechanic
››
Reserve cows: ensuring a constant supply

deal mechanic
In June, NewYork-based Fenway Partners
sold 1-800 CONTACTS to publicly-listed
healthcare company WellPoint. Financial
terms were not disclosed, but a source
familiar with the situation said the exit
generated a 4x return multiple for Fenway.
Fenway had bought the (then NASDAQ-
listed) contact lens company for $340
million back in 2007. Started by chief
executive officer Jonathan Coon out of his
BrighamYoung University dorm room in
1994, 1-800 CONTACTS had increased
revenues from $500,000 in 1995 to $249
million in 2006.
Happily, Fenway was able to keep the
business on a growth trajectory: during its
time under private equity ownership, top
line revenue at 1-800 CONTACTS grew
by double digits every year,while EBITDA
more than doubled.
However, achieving this was no mean
feat – because when Fenway bought the
business, it had some major problems…
1SImplifying the business
model
Perhaps the most serious of these
issues was that the company did
not have enough agreements in place with
contact lens manufacturers to ensure a con-
stant supply of product.As a result, it had
even invested in manufacturing facilities in
both Singapore and the UK, in case supply
ever ran short.
“We were purchasing from suppliers at
the same time that we were making contact
lenses ourselves,”saysTim Mayhew,manag-
ing director at Fenway.And the business was
much better at selling lenses than making
them, he admits.
Indeed, owning and operating two
manufacturing facilities was proving to be a
significant drain on the company’s financial
and human resources, according to Brian
Bethers, president of 1-800 CONTACTS.
“That was a challenging investment for us,”
he says.“We weren’t manufacturers.”
Resolving this supply issue meant sim-
plifying the business model. And why not
– this was, after all, a company that had
been founded on simplicity (just hearing
the name meant knowing how to order its
product).
So one of Fenway’s first acts was to sell
off the company’s manufacturing divisions,
and help to execute supply agreements with
every contact lens supplier.
2Focusing on service
Exiting the manufacturing side
of the business allowed Fenway
to focus on 1-800 CONTACTS’
core competency (and, arguably, its prin-
cipal asset): customer service.
“1-800 succeeds because it provides
fantastic customer service at a really good
price,”says Mayhew.“It just so happens that
it’s selling contact lenses.”
One of the reasons for 1-800 CON-
TACTS’ previous success was that the cus-
tomerexperiencewasfast,easyandefficient.
Customerscouldorderlensesoverthephone
or online and receive them the very next day.
And because all of 1-800 CONTACTS’busi-
ness came through the phone or the website,
excellentcustomerservicewascriticaltothe
company’s success.
“Fenway understood that our business
model is structured around taking care of
customers,” says Bethers. “Sometimes you
can get really mired down in a focus on
trying to save money,without really focus-
ing on trying to take care of customers and
grow the top line.”
Deal
mechanic
Under the
bonnet of
a recent
deal
Profits in sight
FENWAY PARTNERS/ 1-800 CONTACTS
In five years, Fenway
Partners doubled EBITDA
at contact lens company
1-800 CONTACTS, without
eliminating a single job.
Graham Winfrey explains
how
1-800: founded on simplicity and service
1-800 succeeds
because it
provides
fantastic customer service
at a really good price.It
just so happens that it’s
selling contact lenses
4

deal mechanic
But Fenway wasn’t just interested in
taking better care of existing customers.
It would also need to attract new ones
in order to continue 1-800 CONTACTS’
upward trajectory. So after simplifying the
company’s supply model, the firm concen-
trated on finding new ways for customers
to buy the product.
“Our view was: let’s reinforce our
strength by being able to sell to [customers]
in places that we weren’t able to at the time
that we bought the business,”Mayhew says.
3Entering Wal-Mart
In 2008, Fenway helped negoti-
ate a marketing agreement that
allowed 1-800 CONTACTS cus-
tomers to place orders inWal-Mart stores.
“The premise of the alliance was to
make the customer experience completely
seamless,”Mayhew says.“A person can walk
into aWal-Mart vision center or they can
call our number or they can go online, and
their customer information is equally well
known.”
Since establishing the agreement,1-800
CONTACTS’ market share has increased
from 7 percent to 10 percent, according
to Bethers.
“We were always phone and web, but it
gave us experience operating with a store-
based channel,” he says. “I’ve done a lot of
agreements in my professional career [and]
that’s probably the best single agreement
that I’ve seen negotiated,in terms of trying
to address the complexity of the situation
and come up with something that would
be mutually advantageous for both 1-800
andWal-Mart.”
As well as establishing the agreement,
Fenway helped 1-800 CONTACTS partici-
pateinanumberofco-brandedmarketingini-
tiativeswithWal-Marttoincreaseawareness.
The firm also brought in a number of mar-
keting executives to drive additional growth,
including John Graham, former director of
marketingatMrs.FieldsFamousBrands,who
joinedinJanuary2009asseniorvicepresident
ofbusinessdevelopment,andJoanBlackwood,
former chief marketing officer for employ-
ment website Monster.com.
“Joan has helped us evolve in terms of
the look and feel of the advertisements,”
Mayhew says. “We’re very proud of some
of the ads that she’s created.”
While ramping up advertising reduces
the profit 1-800 CONTACTS earns on
first time customers, the company’s level
of customer retention has made its adver-
tising effort a sound investment.
“When we acquire a customer, the first
transaction that we make we barely break
even, because of the customer acquisi-
tion costs of our television [advertising],”
Bethers says. “Where we make money is
through repeat purchasers.”
Today, these repeat customers account
for roughly 80 percent of 1-800 CON-
TACTS orders.
4Going mobile
In 2009, Fenway began investing
in an important new ordering
platform: mobile devices.
“The first great awakening was this move
to mobile, and that meant not just taking
your desktop website and sticking it on a
mobile device but actually taking this ››
Who better to
start to explore
the notion of
buying glasses than the
person who is supplying
your contact lenses?
5

6private equity international
notion of customer service and improv-
ing upon the experience,optimised for the
mobile device,” says Mayhew.“Really great
websites have stumbled and missed the
move to mobile.”
By staying focused on that notion of a
quickandeasycustomerexperience,Fenway
helped ensure that 1-800 CONTACTS’
mobile platform was simple and efficient.
The firm invested in technology enabling
customers to purchase contact lenses in as
little as two clicks,chat with live call center
operatives and reorder by taking a picture of
prescription barcodes and uploading them.
Because roughly 15 percent of contact
lens customers are under the age of 18,Fen-
way’s mobile platform upgrade also focused
on the trend among young people of texting.
“You’ve got to move where the customer
is,and that customer actually wants to text,”
Mayhew says. “All these things make for
faster service.”
Ordering via text message was intro-
duced in 2010, and to make the process of
reordering even easier, the company pur-
chased the SMS rights for “refill”.
Developing the mobile platform also led
Fenway to reassess its main website and add
new email capabilities.
“You can [now] email the company and
get a live response generally within 10
minutes, if not less, from one of our cus-
tomer service representatives,” Mayhew
says.
In 2011,Fenway also helped launch the
1-800 CONTACTS iPhone app,which lets
customers manage their entire family’s con-
tact lens needs.
The investment in mobile has clearly
paid off.Today,close to 20 percent of 1-800
CONTACTS’ revenue is through a mobile
device, up from zero in 2009.
5moving into glasses
Earlier this year, Fenway and
1-800 CONTACTS launched eye-
glass website Glasses.com.
“Who better to start to explore the
notion of buying glasses online or over the
phone than the person who is supplying you
your contact lenses?” says Mayhew.
The website allows customers to order
up to five pairs of glasses at a time for in-
home trial – and send back the ones they
don’t want.
Moving into glasses has given 1-800
CONTACTS another opportunity for
substantial growth.While the contact lens
market is estimated at between $3.6 bil-
lion and $3.8 billion, the eyeglass space is
roughly a $25 billion market.
The decision to expand into glasses
also represents a change in the way 1-800
CONTACTS thinks about the mission of
its business.
“How do you help [consumers] manage
their entire optical needs – [that’s] what
was really in the back of our head,”Mayhew
says.“I feel very comfortable that 1-800 will
continue to expand and become as signifi-
cant a participant in the eyeglass market
as it is in the contact lens business. And
it will do that because of its emphasis on
customer service.”
Today, 1-800 CONTACTS is the world’s
largest contact lens store,with an inventory
of almost 10 million contacts. In a single
day,it sells as many contact lenses as 2,500
retail optical shops combined.
Still, according to Mayhew, the most
important statistic and greatest indicator
of success is the company’s customer sat-
isfaction scores.In 2012,Internet Retailer
magazine ranked 1-800 CONTACTS sev-
enth in customer satisfaction,between L.L.
Bean and Barnes & Noble.
While 1-800 CONTACTS rose to
prominence well before being acquired by
Fenway,much of its growth in the past five
years is clearly attributable to the strategic
initiatives instituted by the firm.And there
was certainly no asset-stripping involved:
in fact, during Fenway’s involvement with
the company, headcount rose more than
10 percent. Definitely a deal that merits
a closer look…
››
7%1-800 CONTACTS market
share in 2007
10%1-800 CONTACTS market
share in 2012
100%EBITDA growth under Fenway’s
ownership
10%Headcount growth under
Fenway’s ownership
deal mechanic

deal mechanic
Cadum knows all about babies.The French
personal care brand, which specialises in
baby-care products,would no doubt agree
that young children need to be nurtured,
given the skills to succeed and ultimately
granted the freedom to venture out into
the wider world.
It turns out, however, that the same
thing is applicable to portfolio companies,
and to Cadum in particular: the company
recently produced a 6x return for mid-
market group Milestone Capital,after being
bought by L’Oreal.The French cosmetics
giant beat out several other bidders in a
highly competitive auction process run by
JP Morgan; the eventual price tag of €200
million was a healthy sum for a company
that generated €58 million in revenues last
year.
This might seem unsurprising, given
Cadum’s long and venerable history (the
company is over 100 years old), its strong
brand recognition,its established presence
in its core French market and a growth
strategy that has seen it expand into three
new countries in the last three years.
But as recently as 2007,it was a very dif-
ferent story.It has taken five years of serious
operational improvement from Milestone
to return Cadum to a level of performance
befitting its pedigree…
1Finding a new platform
Five years ago, Cadum still had the
long history and the brand recogni-
tion in France – but it was struggling
to convert this to sales
“Cadum was already well known in France.
In the street you would ask ‘What is
Cadum?’and they would say,‘Baby products,
soap brand’– 90 percent brand recognition
in the street,fantastic,”says Milestone man-
aging partner Erick Rinner.“But then if you
ask people,‘Well,have you bought a product
from them?’ they would say‘No’.”
Milestone first came across Cadum
and its management team in 2006, while
exploring a deal for a different company.
Three years earlier, the brand had been
acquired (with no staff) from long-time
owner Colgate-Palmolive by a pair of
entrepreneurs, with the backing of CDC
Enterprises and CIC Finance. But despite
their best efforts – and those of the small
team they had built up around themselves
– they’d been unable to take the company
to a level commensurate with their ambi-
tions.At the time, Cadum was generating
around €18 million in sales and €2.5 mil-
lion EBITDA.
Part of the problem, according Rinner,
was that the company had been largely
ignored while under Colgate-Palmolive’s
control. “It had been with the Colgate
family for [50] years, and they had just
neglected it,” he says. “I think that that’s
the problem sometimes with global brands.
They forget about the smaller,local brands
and don’t give them enough attention.”
However,the current ownership struc-
ture was not making life any easier either,
Rinner suggests.“I developed a good rela-
tionship with the CEO of Cadum … He
said,‘We’ve got a quality group of guys in
our capital structure, but they’re French,
they’re local, and they don’t understand
we could grow more quickly.”As a result,
he’d been thwarted in his efforts to inject
more capital into the business, and also
to hire the people he needed to build the
business up.
By contrast,Milestone was intrigued by
the company’s growth prospects.
Deal
mechanic
Under the
bonnet of
a recent
deal
Smelling of roses
MILESTONE/ CADUM
Back in 2007, Cadum
was a well-known French
personal care company
with a long heritage
but a crippling lack of
infrastructure. Enter mid-
market specialist Milestone
Capital… By Sam Sutton
Cadum: big in France

deal mechanic
Nevertheless, the company’s lack of
infrastructure clearly posed a problem;
building a platform of the requisite scale
from scratch would have been prohibitively
expensive and time-consuming.
So instead, Milestone spent six months
looking for another company whose plat-
form could be merged with Cadum’s.
Eventually it settled on IBA, a niche air
freshener provider; its growth prospects
were limited, but its infrastructure,
€20 million annual sales and €4 million
EBITDA created a large enough platform
to accomodate Cadum’s future expansion,
Rinner says.
The firm acquired both Cadum and IBA
in September 2007 for €50 million. Mile-
stone’s equity contribution was €17.5 mil-
lion, with Cadum’s management chipping
in a further €2.5 million; the remainder
was financed with a package of senior and
mezzanine debt.
2Staffing up
At the time of the Milestone acqui-
sition, Cadum only had about 10
staff, all in marketing, purchasing
and accounting. The company had out-
sourced most of its infrastructure to exter-
nal service providers: formulation, logistics,
sales and merchandising were all largely
handled by outside groups, Rinner says.
After the acquisition, the firm merged the
companies’internal operations and replaced
its two external sales forces with a single
internal one. No fewer than twenty-five
sales professionals were hired to broaden
distribution channels, and new executives
were brought in to supplement Cadum’s
existing management team.
“[Merging IBA and Cadum] was a good
decision, not only for the business itself…
We were in a better position to sustain
our growth,” says Jacques Deret, who was
brought in by Milestone as a non-executive
chairman.Deret,a former executive at Sara
Lee, was already familiar with the com-
pany, having assisted in the 2003 deal that
extracted Cadum from Colgate-Palmolive.
The entrepreneurs who had led that
deal stayed with the firm after Milestone
took over – but they got some additional
help.“We had two great founders – the guys
were excellent,”says Rinner.“But they were
doing everything.One was running around,
running the business day-to-day.The other
one was more the creator; he was running
the marketing team… It was very small,
very thin on the ground.We needed to get
a professional team around these guys.”
InadditiontohiringDeret,Milestonealso
created a six-person management commit-
tee,adding a financial director,a commercial
director, a marketing director and purchas-
ingdirectortotheexistingmanagementpair.
(The head of IBA,who was retiring,was not
brought into the fold,Rinner says).
The new set-up paid dividends – quickly.
The brand’s market penetration (i.e. their
distribution in relevant stores) doubled to
between 50 percent and 55 percent;within
four years, it had jumped to 70 percent.
In fewer than five years, the combined
EBITDA of Cadum and IBA leaped from
around €6 million at the time of the acquisi-
tion to €13.2 million in 2011. ››
The
management
was quite lucid
and very clear about the
potential of what they
could achieve,but didn’t
have the means to do it

That’s a serious change of pace – but
according to Rinner, the existing manage-
ment team embraced the change with open
arms.
“It was quite smooth,because [the man-
agement] were frustrated …The manage-
ment was quite lucid and very clear about
the potential of what they could achieve,
but didn’t have the means to do it. So the
frustration level was very high,”Rinner says.
“When we started, it was like freeing up
athletes who wanted to run [but] were pre-
vented from running. So it was like,‘whoa’
– there was a big explosion of energy.”
3Looking further afield
Some of this energy was directed
into new geographies. After
spending two years building up
Cadum’s distribution and sales resources in
its home country, Milestone started casting
its eye toward foreign markets.
Cadum had already ventured into new
territory, so to speak, with the expansion
of its product lines. In addition to devel-
oping a broader range of baby care prod-
ucts, Cadum created a new hygiene line
for children between the ages of 5 and 12,
as well as products for adults. Shower gels
were distributed in larger bottles,to target
family shoppers. And a greater emphasis
was placed on natural ingredients in their
products.
The expansion was hurried along by
a revived marketing campaign. Milestone
used IBA’s mature EBITDA to reinvest into
the Cadum brand, tripling the marketing
budget over three years.
“[This meant] going toTV more, going
to billboards.It was in existence before we
came,but we also enhanced the annual elec-
tion of the‘Baby Cadum’,”Rinner explains.
“It’s a contest in France. Every month they
elect a baby through the internet; then at
the end of the year there’s a grand finale,
and they elect the baby of the year.”
According to Deret, convincing Mile-
stone to invest heavily in marketing wasn’t
always easy – but the increased visibility
paid off. While France’s personal care
market tends to run relatively flat, grow-
ing at a rate of 1 percent to 2 percent per
year, Cadum’s growth rate was around 30
percent per year, Rinner says.
Through the development of new prod-
uct lines,Milestone had opened the door to
opportunities outside of France.The firm
tested the international market in 2009 by
expanding into Belgium through a distribu-
tor and,after seeing some success,decided
to broaden its footprint by crossing the
English Channel in late 2009.The company’s
new intimate hygiene line for women was
considered perfect for the move,as the firm
believed the market for similar products
was underdeveloped in the UK.
Less than a year later, investor appetite
forAsia’s consumer products sector led the
firm to undertake an even more aggres-
sive expansion intoVietnam – where they
quickly captured 15 percent of the baby
product market.
“[Vietnam] was just a test market,and it
was a good market.My view is that L’Oreal
bought [Cadum] because it’s a great French
brand;it’s a heritage brand with a fantastic
image. But it has the potential to grow –
if not global, then at least multinational,”
Rinner says.
4Finding a better owner
By early 2012, Cadum’s growth
was starting to outpace Mile-
stone’s capacities as a mid-market
specialist. Sales had jumped from €18 mil-
lion in 2007 to €58 million in 2011, with
projections of €70 million in 2012.
“At the back end of last year,we felt that the
business was going so fast…We had refi-
nanced the mezzanine after two years.And
we had repaid more than 65 percent of the
senior debt. So we were doing very well,”
Rinner says.“[But] we felt that,as we were
becoming one of the big brands in France,
we were going to have to spend more and
more.And you reach a point where you’re
playing with real big boys – and we’re still
a relatively small business.”
Under the aegis of L’Oreal, Cadum
should have no such problems.
It may have been the right time to sell
(and Milestone is unlikely to be complain-
ing about the healthy return the deal gen-
erated). But it’s clear that the company
would not have reached the sort of size
that allowed it to take on these‘big boys’had
it not been for Milestone’s strategy – which
focused heavily on building the company
up and achieving greater scale rather than
engaging in financial engineering.
“It was not about cutting costs. On the
contrary,itwasaboutinvestingininfrastruc-
ture,investing in people,building a sales and
marketing machine that could grow much
more quickly than before,”Rinner says.
››
€18mSales in 2007
€58mSales in 2011
30%Cadum’s annual
growth rate
25sales professionals
brought in by Milestone
It was like,
‘whoa’ – there
was a big
explosion of energy
deal mechanic

In February, Dutch cable operator Ziggo sold a 21.7 percent
stake on the NYSE EuronextAmsterdam stock exchange, ini-
tially raising €804 million and valuing the business at €3.7
billion.That made it the biggest IPO in Europe since July 2011.
What’s notable about Ziggo is that it’s a business that only
cameintobeingfiveyearsago:itwastheresultofaconsolidation
process led by private equity firmsWarburg Pincus and Cinven,
who combined three regional players into a single market leader.
For a consortium to bring together three separate busi-
nesses – all with their own management teams, sales forces,
specialisms,head offices and so on – and take the new company
public within five years was no mean feat.And while this deal
was interesting from a financing perspective (it was done
during the boom era at a debt multiple of almost 7x EBITDA,
since reduced to less than 4x via three refinancings), there
was also some genuine heavy lifting on the operational side.
the back story
Chronologically, the process began back in 2004.Warburg
Pincus had identified cable as a promising sector, given its
growth prospects and consolidation possibilities, and had
picked out the Netherlands as one of the most attractive
markets. During the summer of that year, the firm first met
with the management of Multikabel:the fourth largest player
in a national industry dominated by three much bigger rivals,
it was being put up for sale by its owner Primacom as a part
of a restructuring process. During the time this took to play
out (nearly 18 months, all told)Warburg Pincus was able to
position itself as the preferred buyer for management, the
seller and even the labour unions. The deal was eventually
finalised in December 2005.
With an enterprise value of €530 million,Warburg Pincus
had envisaged Multikabel as a relatively small growth capital
style investment, at least in the short term. But its original
investment thesis was rapidly overtaken by events:the follow-
ing year, the second and third largest players, Kabelcom and
Casema, both came up for sale at more or less the same time
(Warburg Pincus had been expecting a consolidation period
to happen – just not quite so soon).At this point, the game
changed: now the big carrot was the prospect of combining
these businesses to create a market leader.
However, this deal was too expensive forWarburg Pincus
to do alone (requiring as it did a seven figure equity cheque).
Enter Cinven. Although both firms cheerfully admit that
they prefer not to work with a partner,in this case they didn’t
have much choice:they needed each other’s cash.What’s more,
both sides brought something extra to the table: Warburg
Pincus obviously owned Multikabel,which increased the scope
of the consolidation opportunity, while Cinven had lots of
experience in cable, primarily in France. It was this combi-
nation of resources and know-how that helped them, in late
2006, to win Casema for €2.1 billion, and then subsequently
Kabelcom for €2.6 billion.The three businesses were combined
to create Ziggo – and judging by its subsequent IPO success,
this integration went pretty well. Here are five key reasons
why it worked.
1. creating an entirely new company
“The most important thing was the approach we adopted to the
post-merger integration,”says Joe Schull,the partner who led
the deal forWarburg Pincus.“It was about bringing together
three companies into one that would incorporate the best of
all three, [but] ultimately build a better company. [So] unlike
most mergers, there were no winners and losers.”
“We started off with three head offices dotted around the
country;now the vast majority are based in Utrecht – and it’s
mostly new people. So we’ve effectively built a new company,”
says Caspar Berendsen, Cinven’s partner on the deal.
Warburg Pincus and Cinven created Dutch cable company Ziggo from three regional
players in 2007. In March it became the biggest European IPO for nine months.
James Taylor reports
Network grail
ziggo
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The value-creating aspect of this was that combining the
three companies allowed the new owners to cut plenty of
costs – they managed to strip out‘synergies’ of €120 million
a year,equivalent to about 20 percent of the cost base.Assum-
ing a valuation multiple at exit of about 8.5x EBITDA (as per
Cinven’s investment thesis) putting €120 million back onto
the bottom line creates over €1 billion of value.
This did, of course, mean job losses: Ziggo lost about
10-15 percent of its headcount in the short term (although
it’s now about 25 percent up on where it was).There was also
a degree of hardware sharing. But that wasn’t necessarily the
most important aspect: creating a national player reduced
the charges payable to the central network operator, because
they could cut out the middleman.“The big cost is not really
the cables in the ground; it’s the central network costs,” Ber-
endsen explains.
2. building a new senior management
team
Once they’d taken control of the three businesses, the new
owners set about testing the top 20 managers across the three
firms.They brought in an external consultant to do this,largely
so the process would look more objective from the inside.But
the result was a fortuitous one:it was able to fill the top three
roles with one person from each company. Kabelcom CEO
Bernard Dijkhuizen became Ziggo CEO, while Multikabel’s
CEO became the chief commercial officer, and the Casema
CFO took the CFO job.
This was remarkably convenient:by having a representative
from all three firms at the top table, the new owners could
ensure a degree of continuity, and avoid the impression that
the merger favoured one of the constituent businesses over
the other two.The two buyout firms insist that if the outcome
had been that all three jobs had gone to (say) Kabelcom people,
they would have gone with that – though we imagine that
would have been easier said than done in practice.
This screening process also helped Warburg Pincus and
Cinven identify skill gaps. “If there was an internal candi-
date whom we could promote to a role, we absolutely chose
that option – but the most important criterion had to be
the requirements of the role,” says Schull. “So if we didn’t
have suitable internal candidates – and in several cases we
did not – we always went outside the company.” A ‘Young
Turks’ programme was also established, to try and fast-track
up-and-coming managerial talent.
3. finding the right chairman
The private equity owners are not there to manage the com-
pany directly, of course. But it is their job to challenge the
management team,set stretching targets,and make sure they
We took the view that we’d
invested in a network-based
business,so we were
going to make the
investments required
deal mechanic

get hit. In this, perhaps their most important appointment
was that ofAndy Sukawaty, chairman and CEO of cable com-
pany Inmarsat, as Ziggo’s non-executive chairman. Since he
was already used to working with private equity owners at
Inmarsat, Sukawaty was well placed to mediate.
“Heunderstandstheobjectivesandspeaksthelanguageofboth
managementandshareholders,sohe’sagreatbridgebetweenthe
two,”saysSchull.“Wegenerallyhavehadaverygoodrapportwith
the management team.But there are always occasions when the
wheels grind a bit – so having someone who can speak authori-
tatively in the language of each side is always helpful.”
4. boosting capex
In total, Ziggo has invested over €1 billion in capital expend-
iture during Cinven and Warburg Pincus’s ownership.This
included rolling out a software-based technology called
DOCSIS 3.0 across the network, which can increase broad-
band speeds without the need for new cabling.
“Fundamentally its network is one of Ziggo’s principal
sources of competitive advantage; and maintaining the resil-
ience of that competitive advantage takes investment,” says
Schull.“Some shareholders with a shorter term time horizon
might have sought to extract savings on capex to achieve a
short term financial result. But we took the view that we’d
invested in a network-based business, so we were going to
make the investments required.”
5. getting the product mix right
One of the most important growth areas for Ziggo was squeez-
ing more cash out of its existing users – and a key element of
this was increasing the sale of all-in-one‘bundles’,which include
voice, data andTV.This has become Ziggo’s main sales focus.
“We strongly encouraged management to make bundles the
main service offering, and Ziggo is now by far largest bundle
provider in the market,” says Schull. By the end of 2011 – a
year that saw bundle subscribers climb 17 percent – its market
share was up to around 43 percent.
DigitalTV has also been a big growth area.As with most
developed countries,Holland had already started making the
transition from analogue to digital – but in many cases, the
demand was not there because customers didn’t know what
they were missing. So Ziggo chose to try and get out ahead
of the market by educating its subscribers about the benefits.
This includedTV advertising – which as Berendsen points out,
was another benefit of the company’s increased scale. Nearly
75 percent of Ziggo’s customers now subscribe to digitalTV,
up from less than 15 percent in 2007.
The company also put much more effort into selling to busi-
nesses,particularly SMEs.This was a relatively easy win,since
many of these firms were already subscribers – but this leg of
the business is now growing much faster than the B2C side.
That’s not to say the owners got everything right,of course.
Perhaps the most high-profile snafu came when they tried to
migrate the three companies’ IT systems onto a single, sepa-
rate platform.As often happens with these big IT integration
projects, it went badly wrong. “The issue with the database
was that rather than trying to merge two of the systems into
the third, we tried to merge all three into a fourth – over the
course of a single weekend,” says Berendsen.
But although the episode resulted in some bad PR – man-
agement had to spend the next few weeks publicly apologis-
ing – the actual impact on revenue was negligible. “It wasn’t
pleasant,but we didn’t get much additional churn as we reacted
quickly to the problems,”says Berendsen.“We’d learned from
our previous cable investments that customers were very sticky,
even during periods of operational upheaval.”
And there was at least one upside,according to Schull.“It was
a very good trial by fire for a management team that had had
a lot of success up to that point; it made them very mindful of
the need to pace and sequence complex internal changes.”So it
stood them in good stead for the rest of the integration process.
Either way,the numbers certainly suggest a company that’s
now going in the right direction. Ziggo’s full year results for
2011 showed a 7 percent jump in revenues year-on-year to
€1.48 billion, while EBITDA jumped 6.5 percent to €834.6
million.It was a similarly positive picture when Ziggo reported
its Q1 2012 results recently (the company did end up in the
red, but that was largely due to one-off IPO costs).
So it’s hard to argue with Schull’s assessment:“Ziggo should
stand as one of the singular successes of European M&A... a
business that went through a massive programme of change
and came out as a better and stronger company.”
€120m
Annual costs stripped out of
combined company
€1bn
Ziggo’s capital expenditure
under PE owners
€835m
2011 EBITDA, up 6.5%
year over year
deal mechanic

UK readers of a certain vintage may,in their younger days,have
occasionally found themselves in pet shops: chances are these
were usually dark, dingy fetid places that you wouldn’t wish as
a home on your least favourite gerbil.That’s a world away from
the sleek,modern superstores of Pets at Home.With their giant
rabbits,gleamingaquariumsandpoochpamperingtables,they’re
more like a visitor attraction than a shop (as many parents with
small children have discovered to their advantage).
Happily, part of this success story is a private equity suc-
cess story.Pets at Home initially rose to national prominence
with the backing of 3i in the 1990s. UK mid-market firm
Bridgepoint then bought the business for £240 million in
2004 and owned it until 2010, when it was bought by its
current owner, US giant Kohlberg Kravis Roberts, for £955
million (after an auction process that attracted most of the
industry’s big names).
Pets at Home turned out to be a great investment for 3i,
which reportedly pocketed £91million when the company was
sold in 2004. And it was an even better deal for Bridgepoint:
that sale to KKR equated to a money multiple of eight times
its invested capital, and an internal rate of return of over
90 percent. No wonder managing partner William Jackson
recently told Private Equity International that the deal was a
“clear favourite”.
But that’s not why it’s a worthy subject for this column.The
key point is that its time under private equity ownership has
unquestionably been good for Pets at Home, too. 3i invested
some £25 million over eight years to help the chain grow.
During Bridgepoint’s time at the helm, revenues more than
doubled (growing, on average, by 14 percent a year); profits
almost quadrupled (from £22 million in 2004 to £84 million
in 2010); and its store estate expanded from about 100 to
about 250, creating about 1,500 new jobs. Last year, in its
first full year as a KKR portfolio company, profits climbed
11 percent. From the humble beginnings of a single store in
Chester in North-West England, Pets at Home is now a fully-
fledged billion-pound retail giant.
In other words, private equity did what it’s supposed to
do: make the business substantially better. But how, exactly?
upgrade potential
GuyWeldon, a partner at Bridgepoint and the head of its UK
investment activity,admits that the firm’s task in 2004 was not
to fix a broken business.“It was really all about unlocking the
potential of an already good business, rather than executing
some sort of turnaround.”This was a good solid business, in
a nation of animal-lovers, with customers who are likely to
keep buying and spending whatever the weather, season or
economic cycle.That’s why Bridgepoint had to fight so hard
to win the business in a very competitive auction (in fact at
the time, it was thought to have paid a high price).
Operationally,Bridgepoint’s first priority – and the area it
felt offered the greatest opportunity – was margin improve-
ment.This had two major consequences.
The first was a huge emphasis on boosting own-label
sales – an area that had been previously neglected.“That was
very important,” saysWeldon.“Pets at Home developed from
scratch their value,core and silver ranges,which is the equiva-
lent of good, better, best in supermarket language.They also
developed their own brand specialist ranges, the two best
known of which now are Wainwrights and Purely. Because
own-label has a gross margin that’s something like 13 percent
higher than branded products, it’s not only good from a top
line perspective but also very powerful from a profitability
growth perspective.” From a standing start, these own-label
goods ultimately came to constitute more than a quarter of
all revenue by the time of the sale to KKR.
The other big contributor to margin improvement was the
business’s success in developing a direct import programme,
Three successive periods of private equity ownership have transformed Pets at Home
into a billion-pound retail behemoth.James Taylor looks at how it happened
Gain in cats and dogs
pets at home
deal mechanic

predominantly from China, to reduce costs. By
2010, it was buying up to $70 million of goods
from China – again, from a standing start.
There was only one major strategic change:
a plan already in place to pursue a smaller high-
street format was quickly abandoned. “They
thought it would be interesting to pursue a dual
rollout strategy, with this high street concept
and the retail park stores.We canned that at
the outset,and said we thought it was better to
focus on the already established and successful
concept.”
With that established,it was full steam ahead;
Bridgepoint felt there was a big expansion
opportunity, given the weakness of the com-
petitive landscape.However,it was also keen to
update the look and feel of the stores – which
ultimately accounted for a large part of the extra
£90 million of capital expenditure Bridgepoint
ploughed into the business. “We developed a
new store concept which became the bedrock
of an accelerated rollout program, as well as a
refurbishment of quite a big part of the exist-
ing estate.”
So what did this mean in practice? As well
as introducing a more contemporary feel, and
a stronger departmental organisation (so dog
owners could shop in one place, cat owners
in another, and so on), the key, says Weldon,
was “bringing a sense of theatre and occasion
to the stores”.This focus on the overall retail
experience was smart thinking: having giant
rabbits for children to pet encourages families to come to
the shops, and possibly even to spend money. “The animals
in the stores probably accounted for less than 3 percent of
total sales, but they were at the heart of what the retail
proposition was about.”
A similar ethos underpinned the Groom Room, a new
service introduced for washing and grooming dogs.This has
obvious financial upside:it’s an extra revenue line,with a high
margin,and by virtue of being a service,potentially represents
a recurring revenue stream. But because it all happens in a
glass-walled room within the main store, there’s also an ele-
ment of theatre about it.And there’s nothing like the sight of
a poodle being shampooed to loosen the purse strings.
managing change
Management was one area that did change substantially under
Bridgepoint. “11 of the 15 person management board were
appointed under our ownership,”Weldon explains. “But it
was less a case of upgrading the people in existing functions
– though there was a bit of that – and more about broaden-
ing the team by appointing people into new functions. So for
example the buying director, the multi-channel director, the
marketing director, the head of pets, the logistics director –
none of those titles existed when we bought the business,
but they were all senior members of the management team
six years later.”
deal mechanic
From a standing start,these own-label
goods came to constitute more
than a quarter of all revenue
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As Jackson told PEI last year: “It had a less than perfectly
formed management team, but they had many of the ingredi-
ents of success.... [They] had huge energy and benefited from
youth in the sense that they were open-minded and keen to
learn,and as a consequence were much more flexible than most
management teams.They really had a hunger to drive change.”
Internally, the new and improved management team
made some interesting changes. Staff training received a
lot of attention: staff were put on a ‘steps’ programme
whereby they could earn more money as they completed
more training, with the ultimate aim of creating more in-
store experts. Recruitment was improved by introducing
the so-called ‘hamster wheel process’, which focused on
candidates’ behaviour rather than the past experience.The
focus was on hiring enthusiasts: 93 percent of staff, from
the CEO down, owned a pet.
Feedback was also encouraged via an annual survey called
‘We’re all ears’, where staff were able to rank their part of
the business by a number of criteria.
All told, this had measurable benefits. Staff engagement
(as measured by the survey) jumped from 66 percent to 89
percent. Even more impressively, staff turnover fell from 78
percent in 2003/4 – a high number even by the standards
of the retail industry – to 19 percent in 2010. So judging
by these stats, Pets at Home became a better place to work.
Commercially, management also oversaw big improve-
ments in product innovation – driven by head office, the
business got to the point where it was churning 30 percent
of its products every year – and in marketing, including
the launch of a nationalTV advertising campaign to boost
awareness.
onwards and upwards
So what will the next chapter be in the Pets at Home growth
story?After all, KKR would not have paid out a sum like that
(equivalent to 11.4 times the company’s projected earnings
for 2010) without being pretty confident that Pets had plenty
more left in the tank.
The firm refused to talk about its specific plans – as you’d
expect with such a new investment. But the likelihood is the
strategy will be broadly the same, only more so: more new
stores, more own-label ranges, more grooming salons...The
attached veterinary business, Companion Care, may also be
a focus: it expanded to 53 practices under Bridgepoint, but
it still looks to have some growing room.
It’s likely that Pets at Home will also benefit from being
part of a bigger portfolio, both in terms of costs savings and
idea sharing; KKR knows retail pretty well, having previously
invested in the likes of Alliance Boots, Toys’ R’ Us, Dollar
General and Maxeda.And it’s already welcomed Pets into its
Green Portfolio Program, the initiative aimed at improving
environmental performance (and thus financial performance)
across KKR’s portfolio.
The salient point though, perhaps, is that ten years ago
KKR wouldn’t have got out of bed for this company. Now,
thanks in no small part to private equity investment, Pets at
Home is the kind of retail proposition that would interest
every big financial buyer on the planet. That’s worth cel-
ebrating.
Pets at Home began as a single pet shop in Chester in the
early 1990s. Its expansion was backed by UK listed group
3i in the late 1990s
UK firm Bridgepoint bought the business in 2004. During its
seven years of ownership, revenues more than doubled and
profits almost quadrupled to £84 million. 150 new stores
were opened and 1,500 jobs created
Investment in own-label ranges and sourcing more products
from China boosted profit margins from 10 to 18 percent
11 of the 15 senior managers at the time of the company’s
eventual sale were Bridgepoint appointees
KKR bought the company for £955 million in 2010. Profits
jumped 11 percent in its first full year of ownership
DIAGNOSTIC: KEY FACTS
deal mechanic

“I’ve spent 22 years – that’s half my life – immersed in turning
around troubled or underperforming businesses.And I can tell
youunequivocally:Ihaveneverseenacompanythatwasaspoorly
run asWaterfordWedgwood.In many cases with a turnaround
you have a marketing problem,or a strategic problem,or maybe
a combination of both.This was a case where every single aspect
of the business was broken.”
This is how Mike Psaros,the managing partner of NewYork-
based KPS Capital Partners, describes the company he found
when,in early 2009,his firm agreed to buy some ofWaterford
Wedgwood’s assets from the receiver in Ireland (a deal that
ended up spanning ten separate legal jurisdictions).
The aim of this column is to take a detailed look at examples
of private equity transforming companies for the better.And in
2009,there were few companies in greater need of transforma-
tion thanWaterfordWedgwood.The Irish company clearly had
some famous brands: it makesWedgwood and Royal Doulton
china,as well asWaterford crystal.But financially,it looked like a
basket case:after years in the red,it collapsed into receivership
in early 2009 with debts of more than a billion dollars.At the
time,it was making $450 million in revenue a year – but losing
nearly $100 million,even before interest payments.Various pri-
vate equity firms had looked at it; not one had submitted a bid.
However KPS – which Psaros describes as “a hardcore,
full-body-contact, operations-driven turnaround firm” – saw
potential where others did not.“The big picture was: you had
three magic brand names, each with a 200-year heritage, and
you had spectacular products that were selling in 80 countries
around the world – despite it being the worst-run business I’d
encountered in two decades.That really speaks to the power of
the brands,” says Psaros.
Today,WaterfordWedgwood is a very different business.KPS
won’t give out specific profit numbers,but the company climbed
back into the black in the very first year of the firm’s owner-
ship, and has been growing the bottom line steadily ever since.
Its debt burden, which in 2009 stood at $1.1 billion, is now
less than $50 million. KPS has cut more than $130 million of
cost out of the business,while effectively doubling productivity
thankstoanumberoforganizationalchangesandmanufacturing
improvements (and it was all done in-house,without the use of
external consultants). Not bad for a basket case…
cost-cutting
It helped of course thatWWRD,the holding company formed
by KPS to buy theWaterfordWedgwood assets, started out
free from the huge debt burden that had brought the old
company down (it been spending $60 million a year on interest
payments).By contrast,NewCo’s only debt was a £50 million
asset-backed loan facility from Bank of America to provide
essential working capital (it’s now even lower).
TheWWRD workforce was also much smaller.When it went
bust, the original company had employed about 6,600 people;
Waterford Wedgwood, the famous china and crystal company, almost went out of
existence in 2009.Three years later it seems to be thriving under its new owner, New
York-based turnaround firm KPS.James Taylor talks to the principals involved
Crystal clear
waterford wedgwood/ kps capital partners
It’s almost
impossible
to explain
how bad this
company’s
cost structure
was
deal mechanic

KPS offered jobs to about 3,600 of them (Psaros is very keen
to emphasise that this doesn’t mean KPS made 3,000 people
redundant,since all 6,600 had already lost their jobs as part of
the liquidation process).This clearly made a big difference to
the company’s cost base.
However,thisheadcountreduction–muchofwhichwasdue
toKPSdecidingnottobuythecompany’sloss-makingretailopera-
tion–didnotleadtoahugedropinoutput.Infact,byoverhauling
thestructureofthecompanyandboostingproductivity,thenew
company was actually able to produce the same amount of stuff,
but with far fewer staff.
One of the first things KPS had
done on taking over the business was to
appoint a new CEO, Pierre deVilleme-
jane, who had already worked with the
firm on the turnaround of technology
businessSpeedlineTechnologies.It’seasy
to see why KPS wanted to work with
him again: he made the fund a return of
15.5timesitsinvestedcapitalinjustthree
years. “Pierre spent the early part of his
career at L’Oreal – so he understands
manufacturingandlogisticsanddistribu-
tion, but he also has the classic L’Oreal
luxurygoodsmarketingtraining.Hewas
the perfect guy for the job,” says Psaros.
“I’veknownKPSsince2003andthisis
mysecondturnaround,sowehaveagreat
workingrelationship,”deVillemejanetells
PEI. “Whatever your equity structure,
whenyouhavethisleveloftrustbetween
aCEOandhisboard/shareholder,that’s
the best you can hope for.KPS’s business
modelistobeveryleanintermsofpeople
but they’re very involved in the business;
theytrustwhatIdo,andofcoursethey’re
veryinvolvedinanymajorinvestmentwe
make.”
Butwhilethenewbosswasprimedfor
a challenge,he hadn’t expected things to
be quite so bad.“Everything was broken,”
saysdeVillemejane.“That’swhatshocked
me at the beginning – the extent of the
turnaround required. Everything had to
be re-thought.”
For instance, the four divisions of
the business, previously independent,
were combined into one. “It’s almost
impossible to explain how bad this company’s cost structure
was,” scoffs Psaros. “There were four different manufacturing
processes; four different marketing heads; four different sales
forces… Every single area where there should have been one
consolidated function,there was four.And all four brands were
out in the market competing with each other.”
Yet Psaros boasts that despite this internal overhaul,the com-
pany did not miss a single order during the transition process.In
fact,he says:“[WWRD] is designing,manufacturing and selling
the same amount of product as [Old Co] with half the amount
of people.So the question I still wonder
about to this day is: why was [Old Co]
staffed in such an inefficient manner?”
Improving manufacturing productiv-
ity clearly played a big part.The compa-
ny’s factory in Indonesia is now, accord-
ing to Psaros, “the most cost-effective
plant for high quality bone china in the
world.”SowhatdidKPSchange,exactly?
“Our operations team has spent an enor-
mous amount of time on the shop floor
in Indonesia. It’s about worker training,
manufacturingmetrics,shopfloorlayout,
product flow throughout the plant…
And of course management.”
KPS had decided not to buy the exist-
ing Waterford factory in Ireland from
the receiver, on the grounds that it was
no longer competitive (by the end, it
was down to a single production line).
However,recognising the need to have a
base inWaterford,it persuaded the Irish
government to pay for the construction
of a new site – part factory, part show-
room, part shop. KPS claims the new
WaterfordfacilityisnowIreland’ssecond
biggest tourist attraction,and attracted
some 200,000 visitors last summer.
KPS and de Villemejane also over-
hauled Waterford Wedgwood’s supply
chain,and its distribution model.“The
manner in which the product was
distributed around the world was a
disaster. It was handled too much; it
was shipped to too many warehouses;
the warehouses were in the wrong
place…We literally had to start with
blank piece of paper. How should this
deal mechanic
17

company distribute its products worldwide? That meant a
new warehouse footprint, a new logistics provider, and new
freight companies.”
All told, KPS cut costs line by $130 million. Psaros couldn’t
say how much of this was people-related,but he stresses that it
couldn’t have been done without“attacking every single aspect
of how the product is designed,manufactured,distributed and
sold…Therewerehundredsofuniqueindividualdiscreteactions
taken to achieve [that saving], over an 18-month period.”
early offensive
Gaining the trust of staff was clearly a challenge too;particularly
inIreland,whereKPStookonashrunkenanddemoralisedwork-
force.“Itwasaverydifficulttime,”deVillemejaneadmits.“When
wetookovertherewereallkindsofrumoursaboutusdismantling
thegroupandsellingassetspiecemeal…Ittookagood12months
of high-profile measures to convince people that we were there
to grow a portfolio of brands,not strip assets.”
But although there were plenty of fires to fight, deVilleme-
jane was already thinking about the next stage of the company’s
recovery.“Usually on KPS turnarounds we play defense first – so
youdotheturn,andthenyouplayoffense,”saysPsaros.“Thiswas
one of the rare occasions when Pierre started playing offense
on the day we created the company.”
The key to this was sorting out the company’s outdated and
badly targeted product range.
“One of the issues was a lack of focus on understanding the
consumer,” saysVillemejane.“Because it had gigantic problems
financially,the old management team didn’t spend time thinking
about what type of new products they needed to deliver to the
next generation of consumers.”
The first task was to reduce the number of products.“The
old company was carrying tens of millions of dollars of excess
inventory, largely associated with product that was manufac-
tured but not properly test marketed to see whether there was
consumer demand,” says Psaros.
The second was to revitalize all three brands; soWaterford,
WedgewoodandRoyalDoultonarenolongermeretablewear,but
“luxuryhomeandlifestylebrands”.WaterfordandWedgwoodhave
become the premium aspirational ranges, while Royal Doulton
is intended for a slightly younger, trendier audience. It has also
relaunched RoyalAlbert,an English floral vintage china range.
With developed markets stagnant, the company is throwing
resource atAsia, which now accounts for a third of its revenues.
“We’reonfullattackinChina,”saysPsaros.“Webelievethatwithin
the next two or three years we can have 200 different locations
there.It’s going to be a huge growth market for us.”
Hospitalitywillbe,too,ithopes;it’salreadysignedadealwith
Emirates to supply fine china for its first and business class cus-
tomers (supposedly the biggest such deal an airline has signed to
date), and has just start building a specific team to exploit what
it believes can be a big market opportunity.
BothPsarosanddeVillemejanesaytheynowwishthey’dpushed
their growth strategies harder, sooner.“It’s difficult because you
alwayswantalittlebitofcontinuity,”admitstheFrenchman.“But
thereareacoupleofchangesmadeoverlasttwoyearsthatcould
have been done earlier.”
Still, they’re both clearly very proud of what KPS has done
withWaterfordWedgwood.As Psaros puts it: “A 257-year old
enterprise went into bankruptcy, and nobody wanted to touch
it.Nowlookatwhereit’sattoday.”Theproofofthepuddingwill
come when KPS sells the business – but it’s hard to imagine this
being anything less than a highly profitable exit.
When it went into receivership in 2009, Waterford Wedgwood
had debts of over $1 billion and was losing almost $100 million
a year (even before its $60 million a year interest payments). It
is now profitable and has less than $50 million of debt
Headcount is now 3,600, down from 6,600 – but without any
drop in overall output
Costs have been cut by $130 million thanks to an organisational
overhaul (whereby the company’s four separate divisions were
consolidated into one),an increase in manufacturing productiv-
ity, and an entirely new sourcing and distribution model
Opened a new factory in Waterford, Ireland (the old one had
been closed down by the receiver) to make high-end, hand-
made crystal. It’s now a popular tourist attraction, with more
than 200,000 visitors last summer
Repositioned and re-launched all three major brands – plus a
fourth, Royal Albert
A third of its revenues now from Asia; it plans to increase its
number of retail outlets in China from 30 to more than 200 in
the next few years
DIAGNOSTIC: KEY FACTS
deal mechanic

As retail investments go, buying a high-
end shoe business for £95 million in Feb-
ruary 2008 – just before the onset of
the deepest recession in living memory
– was definitely at the riskier end.Yet
in the subsequent three years, Graph-
ite Capital, a UK mid-market manager
with a good track record in retail, man-
aged to boost revenues at Kurt Geiger
by over 70 percent to £205 million and
create 600 new jobs – before selling the
business to US firm The Jones Group
for £215 million.This would count as a
good deal in any circumstances. But to
pull it off in the middle of a precipitous
fall in consumer spending makes it all
the more impressive.
So how did Kurt Geiger succeed
where so many other retail businesses
failed? It’s true that many luxury goods
firms have (perhaps counter-intuitively)
fared pretty well in the downturn.And
it’s also true that many members of the
fairer sex appear to have an insatiable
appetite for new shoes,recession or oth-
erwise.But its private equity owners can
take some of the plaudits, too...
the initial deal
Kurt Geiger had spent the previous three
and a half years under the aegis of Bar-
clays Private Equity,which had backed a
£46 million management buyout of the
business from department store Harrods
in July 2005. It proved to be a pretty
lucrative investment, too: Barclays PE
doubled its initial investment with the
sale to Graphite.At the time,that looked
like a pretty good deal.With a recession
clearly in the offing,Kurt Geiger looked
very exposed to the likely downturn in
UK consumer spending – and having
been through one period of private
equity ownership already, there was
presumably a chance that the lowest
hanging fruit had already been picked.
Graphite had other ideas, how-
ever. “We assess a business by the
management team’s vision: how well
prepared they are for the economic
circumstances,” explainsAndy Gray, a
senior partner at Graphite who co-led
the deal.“In this case, they had a very
strong plan, with lots of potential
avenues for growth. It was clear that
if one of these avenues was less fruitful,
it could be offset by opportunities in
other avenues – and this gave us the
confidence that even in February ‘08,
we could still do a deal like this.”
Nonetheless,Graphite did structure
the deal conservatively: it made sure
debt was kept to a relatively low level
(about 40 percent of the transaction
value) and that the attached covenants
were suitably generous,in case trading
went really pear-shaped. “It was obvi-
ous that businesses with a lot of lever-
age were going to suffer.When things
are volatile, especially in a sector like
retail where you have a lot of fixed
costs, you have to make sure the debt
doesn’t sink you.”
Gray rejects the idea that it’s harder
to generate outperformance from
secondary deals. “It’s a double-edged
sword.With a primary deal, you’re in
earlier but you have more to do; so
there can be more potential on the
upside, but you have to work really
hard to get it and it all takes a bit longer
to do.With a secondary, some of that
work has been done,so there’s a bit less
risk there and you feel like you have to
In the first of our new regular series on operational value creation, Private Equity
International takes an in-depth look at Graphite Capital’s success with shoe retailer
Kurt Geiger. By James Taylor
Sole trader
Gray: management team was key
Golser: Jones was best possible buyer
deal mechanic

give away a little bit on price as a result.
But it’s not an exact science; some of
our best deals have been secondaries.”
So was he confident at the time that
they’d bagged a bargain? “You’re never
confident – you always think you’ve
paid too much! But it was a price we
were comfortable paying because we
felt there were good opportunities for
us to exploit in the next few years and
the business was led by a great senior
management team.”
easy to manage
The management team was arguably
Graphite’s biggest advantage on this
deal: in CEO Neil Clifford, buying
and creative director Rebecca Farrar-
Hockley and FD Dale Christilaw, Kurt
Geiger already had a well-established
and close-knit senior leadership group
(it helped, too, that its non-executive
chairman Neil McCausland also chaired
Graphite portfolio company sk:n,giving
Graphite a natural way in).
“The top three people were very good
sothatdidn’tchangeatall,”saysGray.“We
meet dozens of management teams,and
theywerecertainlyoneofthebetterones
– very complete and very professional,
with an excellent underlying knowledge
ofthebusinessandastrongfeelforallthe
different opportunities they had.” Graphite’s key role, then, was
to help them prioritise those opportunities – and to strengthen
the second tier of management as the company grew.
Importantly,management were also used to working with
private equity owners.What this meant, according to Graph-
ite’s Markus Golser (the other senior partner on the deal) was
that their reporting was very good,and they were always open
to new ideas. For instance, one of Graphite’s first moves was
to commission an external brand review. Rather than feeling
threatened,management embraced the idea,co-commissioning
the report and ultimately making some substantial changes
as a result of its findings (including the decommissioning of
one of Kurt Geiger’s brands, Solea).
The same was true of cost control, another early Graph-
ite focus. “What we always do is look at the cost structure
and see if there’s anything to be gained
there,”says Golser.“We tend to be very
active in that area and it tends to bear
fruit, because most businesses have
a bit of slack – particularly if they’re
growing very strongly, as that creates
inefficiencies.” So Graphite brought in
a purchasing consultant, who worked
with management to reduce overheads,
particularly in the company’s supply
chain and logistics.
new frontiers
Perhaps the key strategic change insti-
tuted by Graphite was the expansion
of Kurt Geiger’s distribution channels.
This was partly about consolidating
the existing business.At the time of the
Graphite buyout, the biggest chunk of
the company’s revenue actually came
from running the shoe departments of
some of the UK’s largest department
stores,including Harrods and Selfridges.
The latter, which was on a mission to
build the world’s biggest luxury shoe
department,was already in discussions
with Kurt Geiger about expanding that
relationship;so Graphite’s first task was
to help conclude a long and complex
negotiation over the terms of the deal
(how much space Kurt Geiger would
have within the department,who would
be responsible for what,how the revenue should be split,and
so on).
It did so successfully, and was also able to roll out a simi-
lar offering into other department stores like Debenhams
and Fenwick (helped by the collapse of Shoe Studio, a big
competitor in this space – one definite upside of the difficult
operating environment).
But Kurt Geiger’s own-brand store network also grew
substantially under Graphite’s ownership.In the UK,it rolled
out an extra 24 stores in various airports, shopping centres
and high streets. Retail landlords were falling over them-
selves to win the company’s business. “We opened a dozen
stores in a year because we basically got into them for free,”
admits Gray.“In some places landlords proactively wanted us
in as anchor tenants, so we were able to do some very good
Most businesses
have a bit of slack
– particularly if
they’re growing
very strongly,
as that
creates
inefficiencies
deal mechanic
20

deals – long rent-free periods, and kit-out costs paid in full
by the landlord”.
Expansion was also rapid overseas.Kurt Geiger had already
started negotiating with Landmark International about a
franchise deal to open stores in the Middle East; later on in
the investment, Graphite signed similar deals with partners
in Russia andTurkey.All told, the international business was
producing revenues of more than £15 million by the time the
business was sold, compared with very little when Graphite
took control. But the real significance
went beyond that boost to the top line:
it proved the Kurt Geiger brand would
sell overseas, which ultimately made
the business much more attractive to
an international trade buyer like Jones.
Another important development
was the re-launch of the Kurt Geiger
website, which gave the company a
genuine online retail platform for the
first time (it did have a site before, but
without all the bells and whistles we’ve
come to expect of good e-commerce
operations).
Achieving and managing this expan-
sion required lots of new staff. For
instance, the company invested heav-
ily in its in-house design function as
it sought to develop new brands and
products to differentiate these new
offerings without cannibalising sales
elsewhere. All told, headcount almost
doubled during Graphite’s period of
ownership.
It also required lots of homework,
as Graphite worked with management
to evaluate potential opportunities.
Here, Graphite clearly benefited from
its previous experience in the retail
sector. For instance, it walked away
from one potential franchise deal in
Turkey because it was worried about
the potential reputational damage of
expanding too far,too fast,within that
market; having had a bad experience
with a franchise partner in Australia
during its ownership of Japanese
restaurant chain Wagamama, it had
learned this lesson the hard way. “One of the main issues
for a business like this is planning growth,” says Gray. “You
need to make sure it doesn’t try to do too many things at
the same time.”
selling up
The other crucial factor, of course, was that Graphite found
the right buyer at the right time. In early 2011, the firm
received an approach fromThe Jones Group,a big US clothing
company that had practically no pres-
ence in Europe. “We probably would
have looked to sell in the following 12
months anyway, so we were beginning
to discuss next steps with management,”
says Golser. “We debated with them
whether they should do another buyout,
but we felt that given the market, and
given the lack of debt funding for retail
businesses, it would be very hard for
private equity to match a trade price.”
And the strategic fit was obvious:
Kurt Geiger gave Jones an immedi-
ate foothold in Europe, while Jones
gave Kurt Geiger a strong platform to
expand in the US. As a result, Graph-
ite was able to get what was generally
regarded as a pretty generous price –
given this was still,after all,a high-end
retailer operating in a global downturn.
So was it the firm’s best ever retail
deal? “It was a good one for us,” Gray
admits.“Not necessarily the best – but
in the circumstances, we were really
pleased.As the environment got worse,
we were able to sell to the only party
that would pay that price at that time
– i.e. a party that wanted to do other
things with the business.”
Kurt Geiger is a business that’s
been transformed in the last few years.
Clearly the management team has to
take a lot of the credit for that; but its
private equity owners also deserve a
lot of credit for some smart strategic
moves. It would be hard to argue that
Graphite’s investors don’t deserve the
juicy return this deal generated...
We opened
a dozen stores
in a year because
we basically got
into them
for free
deal mechanic

private equity international february 201326
Last July, Equistone Partners Europe sold
travel-related payment services company
Global Blue to Silver Lake Partners and
Partners Group for €1 billion – generating
a return multiple of more than 4x.
When Equistone – formerly Barclays
Private Equity – bought Global Blue (then
called Global Refund) for €360 million
in 2007, it was the second largest invest-
ment in the firm’s history.The Switzerland-
headquartered business provides tax refund
services for retailers to offer to overseas
travellers visiting Europe:after making pur-
chases at luxury goods stores within the
European Union, foreign customers are
able to claim tax refunds at Global Blue
locations, which are primarily in airports.
One of the first companies to enter this
market more than 30 years ago, by 2007
GlobalBlueownedroughlyhalfofthemarket.
It was also attractive to Equistone because it
tickedtwoofitsfavouritesectorboxes:finan-
cial services and consumer/retail.
The timing wasn’t ideal:the business had
to cope not only with some unexpected
shocks – such as when two volcanic erup-
tions in Iceland shut down European air
travel for six days in 2010 – but also the
global financial crisis,which inevitably had
an impact on tourism.
Nonetheless,during Equistone’s period
of ownership,Global Blue doubled its rev-
enues and grew earnings before interest,
tax, depreciation and amortisation from
€35 million to €97 million. Here are some
of the key operational drivers.
1BOLSTERING MANAGEMENT
In order to drive growth at Global
Blue, Equistone strengthened the
company’s management team by
adding a number of senior level executives.
It hired Philipp Manser, former chief
financial officer of Hotelplan Europe, as
Global Blue’s new CFO, and added Arjen
Kruger, former chief marketing officer at
MasterCard Europe, as CMO. The firm
also brought in Henning Boysen, former
president and chief executive officer of
airline catering company Gate Gourmet,
as non-executive chairman.
“Whilst the chief executive officer was
very strong,we did feel that to develop the
senior team with those additions was really
important,” says Owen Clarke, Equistone’s
chief investment officer.
2EXPANDING THE OFFERING
One of the first initiatives Kruger
spearheaded after joining the
company in 2008 was a rebrand –
in order to facilitate the launch of a number
of new products and services tailored spe-
cifically for individual consumers, rather
than just retail stores.
“As the new CMO,I felt that we needed
a rebrand to be able to do that successfully
– so we weren’t seen purely as a business-
to-business organisation,and could start to
build a brand that would appeal to consum-
ers as well,”says Kruger.“So I put that strat-
egy forward to the board and Equistone.”
After changing the name of the company
from Global Refund to Global Blue,Kruger
and Equistone helped add new products
that encouraged repeat sales by offering
shoppers loyalty schemes,introducing them
to specific brands and enabling them to
research various shopping locations.
“All of a sudden, this was a brand that
had a presence in the consumer space,
which we’d never really had,” Kruger says.
“We’re now starting to see the brand in the
eye of the consumer.”
3GOING DIGITAL
As part of this process,Global Blue
focused on making the customer
experience as seamless as possible.
Onewaytodothiswastodigitisetheprocess
Deal
mechanic
Under the
bonnet of
a recent
deal
Betting on blue
Equistone/Global Blue
Over a five-year period,
Equistone doubled revenue
at tax services business
Global Blue thanks to a
series of improvements to
the company’s products
and services.Graham
Winfrey reports
Clarke: bolstered senior team
There were actually
fewer Americans
and Japanese
travelling and
spending,but more Chinese,
Russians and Brazilians

february 2013 private equity international 27
deal mechanic
ofcustomersgettingtheirtaxrefunds,which
had been largely paper-based in 2007.
“You’d print out the form at the retailer,
take that form to customs at the airport to
get it stamped, then take it to the Global
Blue booth at the airport to get your
refund,” says Clarke.
Converting to digital not only enabled
Global Blue to save on processing costs;
it also increased the efficiency of tax-free
shopping.
“[It] makes the whole process very
traveller-friendly and indeed very retailer-
friendly,which means that more people use
the service,” Clarke says. “The bigger win
was the fact that it just made the service
better.It meant that travellers find it easier
to get a refund.”
Annual transactions doubled under
Equistone’s ownership – from 13.5 million
in 2007 to 27 million in 2012.
4ENTERING EMERGING
MARKETS
While the majority of Global
Blue’s customers in 2007 were
Europeans traveling within Europe, one
of the most significant changes Equistone
helped implement was attracting more
business from travellers in emerging mar-
kets.
“There’s been really strong growth in
emerging markets [and] middle class appe-
tite to travel and to buy luxury goods,”says
Clarke.“Strategically, what we were doing
was positioning the business to take advan-
tage of that trend as much as possible – by
opening additional offices and outlets in
Asia, and by positioning an international
website that was operated in Chinese and
Russian as well as English.”
Today, roughly 70 percent of Global
Blue’s revenue comes from emerging market
countries such as Brazil, China, Indonesia,
Russia and Singapore.The company now
has operations in 42 countries, up from
37 at the time of Equistone’s investment.
“It was taking advantage of a trend that
worked very much in the business’s favour
– but making sure that we really rode that
wave of increasing affluence of Chinese and
other emerging market travellers who really
wanted to come to Europe and other places
and spend money on luxury goods.”
Handily, this also offset a fall in devel-
oped market travel after the onset of the
financial crisis.“There were actually fewer
Americans and Japanese travelling and
spending, but more Chinese, Russians and
Brazilians. So those sorts of things were
balancing each other out,” says Clarke.
5POSITIONING FOR FUTURE
GROWTH
Though Equistone has already
reaped a strong return on its
investment, Global Blue is poised for
continued growth under Silver Lake and
Partners Group’s ownership, according to
Kruger.
“The things that we were able to put in
place whilst [Equistone] were our owners
are really going to benefit us over the next
four to five years,” he says.
One of the key strengths of Equistone
as an owner, according to Kruger – and
thus one of the main reasons for Global
Blue’s success – was the firm’s highly col-
laborative style of working. This meant
allowing the senior management team to
put forward its own plans for growth –
and helping to execute those plans when
needed.
“They left a lot of discretion to manage-
ment,” Kruger says. “[For] the issues that
mattered and that were important to the
future valuation of their investment, they
very much had their hands on that.And that
was appreciated.”
Clarke agrees. “It wasn’t a case where
we came in with our operational partners
or our own views and said,‘You need to do
this, that and the other’.This was [about]
developing a strategic plan that the manage-
ment team was leading.” n
Global Blue: rebranded for greater B2C appeal

private equity international march 201326
TrimCoin2005wasasmallHongKong-based
supplierofcare-and-contentlabelstoapparel
brandsthatmanufacturedinSouthernChina.
It was a 30-year-old,family-owned shop that
had reached a plateau – just the kind of busi-
ness that appeals to Navis Capital Partners,a
small-cap buyout firm based in Malaysia.
TrimCo was well-run by the founder,
explains Bruno Seghin, senior partner at
Navis. Cash flow was steady, but revenue
growth and margins were little more than
flat despite the surge of garment manufac-
turers setting up in China.
In 2005,Navis bought a majority stake in
TrimCo for an equity cost of $11.1 million.
Duringaseven-yearholdingperiod,top-line
revenue grew 3.1x and EBITDA grew 3.3x.
ThefirmdivestedTrimCoin2012inasaleto
Partners Group, reporting a 10x exit.
The exit result came in part from buying
well, Seghin says. But the critical ingredi-
ent was the relationship betweenTrimCo’s
founder and Navis.
“Some founders say they agree with you,
but inside they do not agree,” Seghin says.
“But withTrimCo it worked perfectly. She
saw we could help the business.We could
find people, make acquisitions, talk to
banks, things she didn’t do before.”
He believes the key to operational
change is the receptivity of the entrepre-
neur. “We could give the best of ourselves
because we felt that what we were doing
was being recognised and we could add
value.Then it becomes a virtuous circle.”
So what value did Navis add, exactly?
1Expanding out of Hong
Kong
The small care-and-content tag
attached to clothes and sport shoes
mayseemtrifling,butitactuallyhelpstoregu-
late the entire global garment industry.The
tag, which is more difficult to copy than the
garment itself, verifies product authenticity.
TagsareproducedbyTrimCoforbrandname
clients in specific numbers that match a spe-
cificapparelproductionrun.Onetaggoesto
oneitem,givingthebrandsomecontrolover
outsourced production.
The trouble was,TrimCo was manufac-
turing only in Hong Kong and shipping to
Southern China factories – while garment
manufacturing was popping up all overAsia.
Navis, which is well-established in South-
eastAsia,did some research to help identify
the most relevant locations. It ended up
bringingTrimCo intoThailand, Singapore,
Malaysia, India and China, using its local
channels to identify acquisition targets and
recruit employees. As a result, employee
numbers went from 83 in 2005 to 288
in 2011. Production output also grew by
1.62x during the same period.
2Bringing in a second tier
of management
Like most family-owned busi-
nesses in Asia, TrimCo had no
second line management. In order to
grow, particularly in the new markets it
was entering,the business required profes-
sionals in key positions.
Navis brought in a chief financial officer
and worked with her (all ofTrimCo’s man-
agement are women) on developing a finan-
cial control system to track KPIs, explains
Agnes Lee,Navis’investment director.Pre-
viously,TrimCo had an external accountant
and the company looked only at total sales
and profits. The financial control system
Navis introduced looked at product type
and profit by region,which helped support
board-level decisions, Lee says.
A marketing manager was also recruited
to review how to improve service offerings
to clients and sell to new markets.“TrimCo
had a good margin and a good product,and
we believed there must be more clients who
liked what they do,” Seghin says.
Deal
mechanic
Under the
bonnet of
a recent
deal
Tag team
NAVIS CAPITAL PARTNERS/TRIMCO
Over a seven-year period,
Navis’ operational work
with TrimCo grew EBITDA
by 3.3x and helped turn a
small family-owned labelling
business into a global player
– resulting in a 10x return.
Drew Wilson reports
Seghin: aligning with the founder
TrimCo had a good
margin and a good
product,and we
believed there
must be more clients who
liked what they do

march 2013 private equity international 27
deal mechanic
Privateequity’sroleinrecruitingmanage-
mentiscrucial–buttricky,heexplains.“The
chemistry between new people and a com-
panythathasbeenrunningitsownwayfor30
years has to click in the first two minutes of
theinterview.Itcanbefrustratingsometimes.
You can introduce very good quality people,
but the meeting goes badly and you have no
recourse.Weknowthereisnopointtoinsist.
We have to accept that the entrepreneur is
veryinstinctiveandthinksveryquicklybased
on experience.We are the opposite.”
Managementretentionisalsoimportant,
addsLee.BoththeCFOandmarketingman-
ager were put on incentive programs linked
to performance targets, and as a result both
women have stayed on atTrimCo.
3Improving service via
technology
TrimCo manufactures millions of
tags per day, which go to dozens
of different orders.At the same time,labels
are becoming more complex.One mistake
on the label and the shipment is blocked at
customs, raisingTrimCo’s costs.
Navis saw that mistakes sometimes came
from the tag ordering process, which was
manualandclumsy.Customerswouldlookat
various websites for the constantly changing
labelling regulations required by each desti-
nation country,then download the informa-
tion and email it toTrimCo.
The founder had an idea to make the
ordering process more efficient through
technology, but plans were not concrete
and management was hesitant. Discussions
with Navis led to the idea of implementing
an information management system that
centralised and simplified the whole supply
chain, from order to delivery, including
tracking. On this project, Navis acted as a
supportive partner, encouraging manage-
ment to realise the idea and backing them
with expertise as needed.
“Most entrepreneurs are risk-averse
when we first meet them because all their
eggs are in one basket,” Seghin says. “After
Navis buys a controlling stake, they are able
to de-risk and try new things because less
is at stake – and they are not alone.That’s
what we’ve brought,rather than the specific
technical expertise.”
The IT system was the first in the label
industry and it shored upTrimCo’s competi-
tive advantage,Seghin believes.Big competi-
tors were slow to do the same because only a
small portion of their business was garment
labels – while the small players competed on
cost,notservice.TheITplatformwaspartof
the reason some large brand name garment
makers becameTrimCo clients.
“We took the business away from the big
guys,” he says.
4Building a platform for
growth in Europe
InApril 2012,as Navis was about
to exitTrimCo in a secondary sale
to Partners Group,it closed the acquisition
of a large UK-based label manufacturer it
had been talking to for two years. On exit,
Partners bought the company together with
TrimCo.
The add-on acquisition broughtTrimCo
a presence in the UK,Turkey,Romania and
Bangladesh – key garment manufacturing
markets. In addition, the integration will
bring the UK manufacturer significant cost
structure savings by using TrimCo’s Asia-
based manufacturing, Seghin says.
Navis had already done full due diligence
on the UK manufacturer, so Lee provided
the buyer with a detailed integration plan
that laid out the growth strategy.
“The UK target was totally complemen-
tary toTrimCo and gave the buyer reserve
growthforthecoming2-3years,”Seghinsays.
The double acquisition increased the
potential for problems. But Seghin says
Navis was able to complete them together
because it had built trust with the seller,
which the Navis team had been in talks
with, and the buyer, having worked with
Partners Group for many years. n
TrimCo: boosted production by 1.62x under Navis’s ownership

private equity international april 201324
Rosemont Pharmaceuticals occupies an
unusual niche: founded in 1967, it makes
oral medicines for patients – mostly old
people – who have trouble swallowing
standard pills and capsules. In 2006, UK-
based lower mid-market group CBPE
Capital paid £93 million to buy the busi-
ness from former owner Savient Pharma-
ceuticals.
CBPE’s previous pharma experience
was key to winning the deal, according to
partner Sean Dinnen. “When we met the
management team, they could tell quickly
that we had a good grasp of the pharma
sector – which is relatively rare in the lower
mid-market,because it’s a specialised area.”
Dinnen and his team felt the business
would benefit from more active ownership.
“Savient had bought the business oppor-
tunistically,and hadn’t really done anything
with it.We could see that if certain things
were done,it had significant growth poten-
tial.”
So it proved.During its six years of own-
ership, CBPE helped the company more
than double EBITDA, from around £8.7
million to £19.2 million, while expanding
staff numbers from 156 to 209.This year,it
was able to sell the business for £183 mil-
lion,banking a 3.25x return on its original
£53 million equity cheque. Here’s how.
1Sticking to the knitting
The first key decision, according
to Dinnen, was to remain focused
on liquids, rather than branching
out into other related areas (like creams,
ointments and so on). “Our fundamental
strategy was to develop a business that had
a reputation for being best-in-class glo-
bally in oral liquid formulations.Another
owner could have gone down a different
route, but we wanted to remain pure-play
liquids.”
As part of this drive to become best in
class, it stopped doing contract manufac-
turing for other pharmaceutical companies
– a high volume but low margin business
– to focus on its own products.
It didn’t shun the pharma giants alto-
gether, however; on several occasions it
worked with one of the big players to
develop a liquid version of their drugs
(notably with Lundbeck on its epilepsy
drug clobazam, which Rosemont eventu-
ally took to FDA approval in the US). But
that was a different sort of relationship –
and by establishing Rosemont as a trusted
expert, it helped to bolster the company’s
best-in-class credentials (and thus its even-
tual valuation).
2Improving the
manufacturing process
As soon as it acquired Rosemount,
CBPE gave the green-light to a
plan – worked on but not executed under
the previous ownership – to “materially
upgrade” the company’s manufacturing
facility in Leeds, and to expand and refur-
bish its warehouse.
With the help of some specialist man-
ufacturing consultancies, this project was
completed over a period of almost three
years, at a cost of about £6 million.
“When we bought the business, the
manufacturing facility had a totally illogi-
cal and inefficient layout,”explains Dinnen.
“For instance,the half-finished product had
to be transferred from the end of the pro-
duction line across the site to the quality
assurance and bottling area. So we totally
reconfigured the site – both to make it
more efficient and to increase capacity.”
By the time the company was sold,
capacity had increased from 6 million bot-
tles to 10 million (current production is
about 4 million bottles, so Rosemont still
has plenty of growing room).
Deal
mechanic
Under the
bonnet of
a recent
deal
Liquid returns
CBPE/Rosemont Pharmaceuticals
In its six years as owner of
Rosemont Pharmaceuticals,
CBPE helped the business to
overhaul its manufacturing
process,expand its
product line and bolster its
management team – more
than doubling EBITDA in the
process.By James Taylor
Dinnen: let management run the business
We totally
reconfigured the
site – both to make
it more efficient
and to increase capacity

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