Castle Harlan Takes Off Diapers –

A standard requisite for many private equity targets is that they operate in an industry that sees steady cash flow, regardless of macroeconomic trends. With previous investments in the shipping, fast food, and law enforcement industries, Castle Harlan is savvy to finding the products that people want and need. And the firm’s latest exit proves that the firm has found another steady cash flow industry.

In late June, Castle Harlan’s Australian affiliate, Castle Harlan Australian Mezzanine Partners (CHAMP), sold Australian Pacific Paper Products, a manufacturer of disposable diapers, to Gresham Private Equity, another Australian private equity player. The transaction was valued at A$75 million (approximately $57.7 million). For CHAMP, which owned 80% of the company, the sale represents a complete exit. Company management has rolled over an equity stake with the new owners.

In addition to manufacturing and distributing disposable diapers, Melbourne-based Australian Pacific is also a distributor of adult incontinence products. The company reported 2004 revenues of A$104 million ($80 million) and EBITDA of A$13 million ($10 million).

CHAMP acquired Australian Pacific for A$53 million in 2002 from DSG International Ltd. (NASDAQ: DSGIF). At the time, the company had annual sales of about A$100 million and EBITDA of approximately A$9.6 million, according to the firm. “We liked their market position. They were a strong No. 2 in a [diaper market] duopoly,” Castle Harlan Senior Managing Director Howard Morgan, told Buyouts. He added that the non-cyclical, non-fashion-related industry, represented a strong platform opportunity continued growth.

For CHAMP, the diaper industry proved to be a gift that keeps on giving. Prior to this most recent liquidity event, the firm was able to recoup 80%, or A$42.4 million, of its original investment though a May 2004 recapitalization. The firm’s gain from both the final exit and recapitalization totals about A$52 million and represents a return of 2.6x its equity investment with a 56% IRR, according to the firm.

“Our view is that we have certainly done a lot to enhance performance and work with management at the company,” Morgan said. “On balance, we simply had a strong company to put on the market.

To increase Australian Pacific’s value, CHAMP’s depended largely on new product development, particularly in the newborn and infant markets; where the company previously had little penetration. The younger markets are advantageous, Morgan said, because when products with strong brand recognition, such as diapers, are used on a newborn, the caretakers will often stick with the same brand throughout the life of the child. The development of new products also helped by awarding Australian Pacific with more shelf space at retail outlets, Morgan said.

Additionally, CHAMP put money into consumer research, advertising and packaging, which helped increase the company’s penetration in neighboring New Zealand. “There was no silver bullet. We strived to make incremental gains across the customer base,” Morgan said.

And there is still a lot of meat left on the bone, for the company’s new financial sponsor to take advantage of. “It still has the same fundamentals as when we purchased it,” Morgan said. “We only introduced the newborn and infant products recently, so there is plenty of time to capitalize on the penetration in that market. There are also cost-saving gains on the manufacturing side that can be exploited, growth opportunities in the adult incontinence market-which, as a fact of life, is a growing market-and good opportunities for add-ons.”