The Big Story
Why Consensus Joined the Terra Alliance
Michael A. O’Hara
On April 16, 2018, after a 6-month trial period, Consensus was invited to become the 16th member of a global network of investment banking firms called The Terra Alliance (http://terra-alliance.com/). The alliance includes members in Europe, Asia, Australia, the Middle East, Africa and North America. The alliance intends to add health care- and technology-focused firms in the U.S. to complement our firm’s consumer orientation and Chicago-based InterOcean Advisors’ strength in industrial markets.
The alliance was founded in September 2002 by the corporate finance departments of several independent private banks in Europe to enhance their ability to serve their clients on cross-border opportunities. The group has now evolved well beyond Europe, and its member firms advised on more than 200 M&A transactions with a total value in excess of $8.5 billion in recent periods.
Accepting Terra Alliance’s offer was easy for us for two main reasons. Firstly, our clients are increasingly interested in looking beyond the U.S. for acquisition opportunities, whether on the buyside or the sell-side. Secondly, our own practice has become increasingly international, as large foreign companies and investors look to the U.S. for innovation in the consumer sector or to tap into the large and vibrant U.S. consumer and financial markets.
In addition to regular contact, Terra Alliance members meet in person in the home market of one of its members twice a year to provide each other with market and economy updates and present transaction opportunities. At the Alliance’s April meeting in London, Consensus got its first chance to interact in person with many of the banks in the Alliance. We were reminded of two very important things: (i) each market is unique in its culture, economy, language and customs and (ii) despite these differences, we have much more in common, most notably the international language of business. The meetings emphasized to us that on something as important as cross-border strategic actions, we (and our clients) truly should have an ally in the local market.
To our friends and allies considering cross-border strategic activities, we will be glad to make introductions to the relevant member or members of the Terra Alliance. We are confident you will benefit from their contacts, local knowledge and skills.
Headlines of the Week
Edward Lampert is pushing for a more aggressive breakup of Sears Holdings Corp. as the hedge-fund manager aims to salvage what’s left of the struggling retailer and stave off a potential bankruptcy filing. The announcement sparked a 7.6 percent share jump to $3.24 last Monday. Lampert’s hedge fund, ESL Investments Inc., said selling the appliance maker Kenmore, home-improvement services and an appliance part-replacement business would improve the debt profile and liquidity of the beleaguered retailer, according to a statement from Sears.
Amazon announced during its quarterly earnings call that the price for its Prime membership is going to increase by about 20 percent for US users. The hike will raise a Prime membership from $99 a year to $119, effective May 11th for new members and June 16th for existing ones.
Apparel & Footwear
Gap is making a big bet on Old Navy. The discounted apparel brand will add 60 more stores across North America this year, pushing its total to more than 1,000 Old Navy locations in the U.S. by the summer. Gap, which also owns the flagship Gap banner, Banana Republic and Athleta, currently operates more than 3,500 stores globally. Gap is meanwhile trimming back its fleet of Gap and Banana Republic stores, which haven’t performed as well as Old Navy and Athleta of late. It’s all part of the retailer’s updated growth strategy announced late last year, which called for roughly 200 Gap and Banana Republic stores to close by 2020. In addition to opening new locations, Old Navy will also be remodeling roughly 150 stores over the next few months.
In early 2002, just a few months after he officially took over as the new owner and chief executive officer of Brooks Brothers, Claudio Del Vecchio confronted the reality that the classic American retailer had largely lost its way. Mr. Del Vecchio knew that many of the clothing fabrics were no longer of high quality, that too many of its shirts were ill fitting and that there were often disconcerting irregularities, like a rack of navy blazers that weren’t the exact same shade of navy. And longtime customers had noticed. Among Mr. Del Vecchio’s first acts as owner was to read a stack of angry letters from Brooks Brothers loyalists who griped about how the merchandise quality had fallen under the previous owner, the British retailer Marks & Spencer. They also balked at the limited selection of classic blazers and suits in the stores. Those letters confirmed much of what Mr. Del Vecchio, a wealthy Italian entrepreneur, had seen for himself and stiffened his resolve to return to the company’s roots. “I saw the business opportunity to increase sales,” he said. “I knew how to fix this.”
Athletic & Sporting Goods
Huntington Beach-based Boardriders Inc.’s bid to acquire longtime rival Billabong was completed this week, creating one powerhouse surf company that executives hope will stimulate a new wave of success for the surf industry. Boardriders Inc. is made up of Quiksilver, Roxy and DC Shoes. It now adds not just Billabong, but also RVCA, Element, Von Zipper, Xcel, Kustom and Palmers, many of which are based in Orange County. Billabong’s North America office is located in Irvine. The combination of the brands makes Boardriders Inc. the world’s leading action sports company, with more than 7,000 wholesale customers in more than 110 countries and over 630 retail stores in 28 countries.
Life Time has moved into the Pacific Northwest and made a purchase in the massage and spa market, the company announced. In April, Life Time opened its first club in the Pacific Northwest in the Seattle suburb of Bellevue, Washington. Life Time also recently acquired Massage Retreat & Spa’s six locations in Minnesota for an undisclosed amount. The Plymouth-based brand was founded by former Life Time employee Lee Oberg.
Fulcrum Capital Partners, a private equity firm focused on the Canadian middle market, announced the acquisition of Athletica Sport Systems. Athletica, a leader in arena services is a designer, manufacturer, and installer of dasher board systems for hockey arenas and multi-sport athletic facilities, serving the professional, semi-pro and community end-markets. Headquartered in Waterloo, Ontario, the company also has an office in Minneapolis, Minnesota.
Cosmetics & Pharmacy
Debt-ridden GNC plans to close about 200 stores this year, the company said. The Pittsburgh-based health, nutrition and vitamin/supplement chain, which has more than 1,000 franchise locations in the U.S. and Canada, is about $1.3 billion in debt, it said in announcing its first-quarter earnings. GNC also operates 2,400 store-within-a-store locations at Rite Aids. The closure announcement comes with a caveat as lease renegotiations or the relocation of stores could change the numbers of stores that will close. GNC added a “limited” number of new stores are expected to open this year. GNC reported a net income of $6.2 million in the first three months of 2018, well short the $24.7 million it posted in the same period last year.
CVS Pharmacy is acquiring all 14 of the retail pharmacies operated by Marshall, Mo.-based Red Cross Pharmacy, effective June 6. CVS Pharmacy said that it would be transferring files from stores in Grain Valley and Kearney, with the remaining locations set to remain operating in the same locations with the same staff. CVS Pharmacy said the acquisition would be completed in mid-July, with the locations rebranded and converted to CVS Pharmacy banners. With Red Cross Pharmacy’s retail pharmacy operations sold, the company is left with two long-term care pharmacies and a medical equipment company.
As it continued to implement its Project Refuel strategy to streamline the business, Helen of Troy reported fourth quarter sales growth driven by its health and home and housewares divisions. Helen of Troy reported consolidated net sales revenue increased 12.5% to $390.8 million for the three-month period ended February 28, 2018, compared to $347.4 million in the same period last year. The net sales increase includes the contribution from new product introductions, online customer growth, incremental distribution and growth in international sales. Income from continuing operations was $8.4 million, or $0.31 per diluted share compared to $34.4 million, or $1.25 per diluted share in last year’s fourth quarter
Discounters & Department Stores
Kohl’s outgoing CEO, Kevin Mansell, said the retailer’s efforts within the past year are helping drive new shoppers to its stores, while retaining loyal customers. “We are much more positive as we go into ,” Mansell told CNBC’s Courtney Reagan on “Squawk on the Street.” “We think amplifying the role of the store is the right strategy for us.” Kohl’s has nearly 1,200 locations today, most of which are situated away from malls, unlike its peers Macy’s, J.C. Penney and Sears.
Grocery & Restaurants
In the wake of a proxy fight, Supervalu Inc. has unveiled plans to sell and lease back eight of its owned distribution centers and divest its Shop ’n Save retail operations. The retail grocery operations being put on the block include Supervalu’s Shop ‘n Save stores in St. Louis and Shop ‘n Save East stores in West Virginia, Maryland, Pennsylvania and Virginia, which had been acquired from Food Lion.
The parent to the Slater’s 50/50 burger chain is in the process of acquiring the Daphne’s California Greek brand, planning to rework the Mediterranean concept for new growth, officials said Monday. Mike Nakhleh, president of Los Angeles-based Elite Restaurant Group, said his company took over operations of 23 Daphne’s locations — all in California —about five months ago, though the acquisition is not expected to close for about another month. Terms were not disclosed. Nakhleh said the company has plans to franchise the fast-casual Daphne’s, as well as add roughly 10 new corporate locations annually.
Home & Road
True Value Company and ACON Investments have finalized a strategic partnership to accelerate the transformation of True Value Company and create the only branded national hardware wholesaler without a membership requirement. As previously announced, ACON’s strategic investment will result in approximately $230 million in returns and credits to current True Value retailers, who will receive 70% of their invested capital and 100% of their promissory notes on top of their 2017 Patronage Dividend. Retailers will also retain a 30% holding in the new True Value Company, which will be led by the existing management team. True Value Company, headquartered in Chicago, is one of the world’s leading hardlines wholesalers with a globally recognized brand and over 70 years’ experience serving independent hardware retailers.
Pier I Imports is updating the appearance of its stores as part of its new three-year turnaround plan. The retailer plans to redesign all its stores, with a more toned-down vibe and neutral palette that will offer a more modern, less busy- look and allow the merchandise to stand out, reported Forbes. Pier I expects to roll out the redesign, which has already been implemented in the Dallas-Fort Worth market, this fall. Pier I revealed the details of its plans after it reported disappointing results for its fourth quarter and full year. Commenting on the results, Neil Saunders, managing director of GlobalData Retail, said the poor performance of its stores was dragging Pier I down. Pier I ended fiscal 2017 with roughly 1,020 locations.
Jewelry & Luxury
Houston-based fashion jewelry and accessories chain Charming Charlie announced yesterday that it’s emerged from Chapter 11 with new management, improved financial positioning, and a sustainable capital structure “to support its back-to-basics strategy,” according to a prepared statement. The company, which operated close to 400 stores nationwide in mid-2017, closed around 100 stores late last year, bringing its current total store count to 264. The reshuffling of management that ensued included the hiring of new CEO Lana Krauter.
De Beers and Alrosa both recently released production numbers for the first quarter of 2018, but reported very different results. De Beers said rough diamond production increased 15 percent to 8.5 million carats in the first quarter, boosted by the Gahcho Kué mine in Canada and increased production from the Orapa mine in Botswana in response to “sustained healthy trading conditions.” In Canada, output rose by 69 percent to 1.1 million carats as De Beers ramped up production at Gahcho Kué. The company said production in Botswana increased 12 per cent to 5.8 million carats while holdings in Namibia were up 12 percent to 500,000 carats due to access to consistently higher grades.
There is some anticipation for the coming months at Tiffany & Co. A year after joining the company, its celebrated chief artistic officer Reed Krakoff is readying to launch his first new jewelry collection on the job. CEO Alessandro Bogliolo, who took his position in October, promised the line would “be a very nice surprise for the market, with an addictive kind of product,” he told analysts in the company’s fourth-quarter earnings call. The word “surprise” came up a number of times in Bogliolo’s remarks on the call, as transcribed by Seeking Alpha, whether referring to Tiffany’s product offering, store presentation or customer relations.
A new blockchain initiative spearheaded by Richline working with IBM will be able to tell consumers where the gold and diamonds in specific rings come from. TrustChain Jewelry is still in its pilot phase, but Richline chief marketing officer Mark Hanna says his company hopes to scale it up and make it available to the entire industry. “We have set it up from the beginning with IBM to be open source and to include the rest of the industry,” he says. “We never did this for Richline. We wanted a complete industry perspective.”
Office & Leisure
Mattel Inc., which named a new chief executive last week, softened the effect of Toys “R” Us Inc.’s demise as its all-important doll brand posted the best growth on record. Shares rose as much as 9.4 percent to $15.30 on Friday, the biggest intraday gain since Feb. 2. The stock had plummeted 38 percent in the past year ahead of the earnings release. When excluding $30 million of sales lost in the liquidation of Toys “R” Us, Mattel’s revenue rose 2 percent, fueled by the toymaker’s biggest brand. Barbie’s sales surged 24 percent, marking the second straight gain after a rough stretch and the best quarter since at least 2009, when it started breaking out the numbers. Getting to sales growth of 2 percent, excluding Toys “R” Us, is a “big deal, given where we were last year.” Barbie’s strength helped Mattel’s biggest properties — which also include Hot Wheels, Fisher-Price and Thomas & Friends — grow a combined 2 percent during a quarter when the world’s largest toy-store chain announced the shuttering of operations in the U.S. and U.K.
Technology & Internet
Amazon reported a huge beat across the board for its first-quarter earnings on Thursday, with particular growth coming from its AWS cloud service and advertising business.
The gross value of goods sold on eBay’s U.S. marketplace increased 7.2% year over year to $9.48 billion from $8.84 billion in the first quarter ended March 31, the online marketplace reported Wednesday. Globally, total gross merchandise volume grew 12.9% to $23.59 billion in Q1, up from $20.90 billion a year ago. Net revenue for eBay’s global marketplaces, which comes from the fees paid by eBay’s sellers, increased 12.0% to $2.580 billion from $2.303 billion a year ago.
Austin, Texas-based BigCommerce has completed a big round of funding. The growth-stage startup, which powers e-commerce sites for Sony, Toyota and 60,000 other merchants, has raised $64 million to accelerate its business. The investment was led by Goldman Sachs, with participation from General Catalyst, GGV Capital and Tenaya Capital. And it brings BigCommerce’s total raised to more than $200 million since it was founded in 2009. BigCommerce has developed a template for its customers to launch websites with manageable shipping and payments tracking. It also makes it easy to cross-sell on Amazon, eBay and Facebook. The company claims it is able to help e-tailers cut down on costs by as much as 80 percent.
Finance & Economy
The U.S. economy likely slowed in the first quarter as growth in consumer spending braked sharply, but the setback is expected to be temporary against the backdrop of a tightening labor market and large fiscal stimulus. Gross domestic product probably increased at a 2 percent annual rate, according to a Reuters survey of economists, also held back by a moderation in business spending on equipment as well as a widening of the trade deficit and decline in investment in homebuilding.
U.S. consumer confidence rebounded in April and new home sales increased more than expected in March, pointing to underlying strength in the economy despite signs that growth slowed in the first quarter. Other data also showed house prices increasing solidly in February. Strong consumer confidence and rising house prices should underpin consumer spending, which appears to have braked sharply at the start of the year.