Deal of the Year: Yellow Wood finds a fortune in fragrance

WHY THEY WON:

12x multiple

~77 pct IRR

13 pct organic growth at exit from 5 pct

5x Ebitda growth

One of the common refrains these days is that retail is dying. The only investment players really interested in retail are the vultures, looking to pick the corpses of once healthy consumer brands.

But an exit last year blew that narrative to bits. Yellow Wood Partners, a firm formed in 2011, sold personal care company PDC Brands to CVC Capital Partners for a 12x multiple and an around 77 percent internal rate of return.

PDC Brands has products in bath and body care, multicultural hair care, fine fragrance, cosmetic eyelash and nail, and first aid, for retailers in more than 50 international markets.

Yellow Wood, led by ex-J.W. Childs & Associates President Dana Schmaltz along with Partners Tad Yanagi and Joe Atencio, invested in PDC in 2012 and grew its initial $83 million investment into total proceeds of more than $1 billion, a home-run-level investment that makes it this year’s Buyouts Deal of the Year.

“We basically took a mundane opening-price point fragrance business and created a double-digit-growth consumer products juggernaut,” Schmaltz said. “Despite people saying retail is dead, guess what? Retail is not dead; look at what we were able to do.”

Here’s how they did it

Yellow Wood acquired PDC in 2012 in a Houlihan Lokey-run auction. The acquisition was the first out of Yellow Wood’s debut fund, which closed on $225 million in 2012.

At that time, PDC sold mass-market fragrances under brands like Body Fantasies, BOD Man and Designer Imposters.

Yellow Wood bought out the original fragrance part of PDC (Parfums de Coeur) for $160 million in September 2012, financing the acquisition with debt led by Antares Capital, Ally and Kayne Anderson.

During PDC’s growth, Yellow Wood accomplished several strategic initiatives, as well as completing five add-ons outside of auction processes, bringing new brands under the PDC umbrella.

The firm provided operating partners in key areas to work with PDC management to execute on initiatives, including accelerating organic growth, which moved from 5 percent pre-acquisition to 13 percent after acquisition.

“We met with the management team at least once a month, every month, for five years,” Schmaltz said.

Key initiatives

Yellow Wood installed new senior managers, including a chief financial officer, chief marketing officer, senior vice president of operations, vice president of customer service and senior vice president of international sales.

Under Yellow Wood’s management, PDC transitioned from a tightly controlled founder-owned business to a broader, more balanced and scalable organization, the firm said.

PDC reallocated marketing spending into more appropriate programs and increased the marketing budget by more than 4x. For the Dr. Teal’s brand, PDC also created a dedicated advertising program, which resulted in brand growth tripling by the time of exit.

The company improved the supply chain, meaningfully reducing costs, including by improving freight and warehousing costs by outsourcing to a centrally located third-party logistics provider. The supply chain improvements with reliability and customer service levels led to Walmart giving PCD its Supplier of the Year award for 2017.

For international expansion, PDC hired a senior vice president of international to expand distribution with a focus on Canada, Mexico, the U.K. and Europe, Japan and Korea. International sales grew nearly 5x from acquisition to exit.

The company also acquired a U.K.-based company to improve cross-selling across brands, which resulted in more than 3x sales growth in U.S. markets.

In 2017, William Blair and Jefferies conducted an auction to sell PDC, which led to the sale to CVC for $1.425 billion. In less than five years, PDC’s revenue increased by more than 4x and Ebitda grew by more than 5x.

The PDC deal “validates our strategy of buying a platform and building a really valuable company,” Schmaltz said. “It was a labor of love.”

Correction: A previous version of this report misspelled Tad Yanagi’s name. The report has been updated.

Photo of Dana Schmaltz and Ted Yanagi courtesy of the firm