Falconhead Buys Premier and Sells TGW –

A Beauty Of A Buy

Alongside a strengthening economy, the day spa and salon industries are showing an increase in business and popularity. Capitalizing on this development, private equity firm Falconhead Capital purchased a control stake in salon chain Premier Salons and plans to merge it with another of its portfolio companies Stonewater Spas.

Premier is a Toronto-based company that operates more than 400 salons in North America. The deal, which closed at the end of June, has a combined enterprise value of $100 million, and secured Falconhead a 60% stake in the salon company. The remaining 40% of the company will continue to be held by its management.

The undisclosed amount of equity used for the acquisition came from Falconhead’s Sports Capital Partners LP fund, a vehicle that closed with $214 million in 1999 and is now 75% invested. CapitalSource Finance LLC co-invested with the firm and provided the $30 million of debt for the deal, Falconhead Chairman and Chief Executive Officer David Moross said.

The merged Premier/Stonewater company will be known as Premier and have a combined revenue of more than $125 million. Annually, Stonewater Spas-a collection of 21 high-end U.S.-located day spas acquired by Falconhead since 2002-has been coming away with approximately $50 million in sales. The newly acquired Premier-founded in 1984-has recently been turning out about $75 million of sales per year. Premier’s Founder and CEO Brian Luborsky will remain at his post, Moross said.

The proprietary deal materialized while Falconhead was shopping in Europe for its next investment, Moross said. “The CEO of the company we were looking at mentioned Premier and recommended that I get in touch with Brian Luborsky. After researching the market, we saw the needle pointing heavily toward spa and salon usage, cosmeceutical products and organic creams. It’s a trend we don’t see changing.”

“In 2001, the U.S. spa industry achieved approximately $10.7 billion in revenue. Half of the spa industry’s revenue are derived from treatment rooms. Beauty salons and retail also account for significant portions [32%] of industry revenue,” according to a 2002 study of the Spa Industry commissioned by PricewaterhouseCoopers for the International Spa Association. The study goes on to say, “The spa industry has solidified itself as a major player in the hospitality and leisure sector. In the past two years, the spa industry has kept pace with, and even surpassed other major leisure activities.”

Moross said it was far too early to have a clearly defined exit strategy for the newly forged salon/spa entity, but that the nature of the business’s extremely targeted distribution leaves open a large possibility for a strategic exit. “But, as the scale of the combined enterprise increases, an IPO might be possible.”

Bye Buy Birdie

In an all-cash deal Falconhead Capital exited one of its first-ever acquisitions, online golfing equipment retailer The Golf Warehouse (TGW). The $31.5 million sale was finalized just days before the close of the second quarter. The New York-based firm sold the company to strategic buyer The Sportsman’s Guide, a St. Paul, Minnesota-based catalogue and Internet retailer.

Falconhead sold its entire 72% stake in TGW, making 4x its original investment and an IRR of 35 percent. The pronouncement to put TGW on the auction block came after two hopeful buyers made preemptive offers for the golf retailer, Moross said. The firm rejected both bids and made the decision in February to put the company up for sale.

“You get to a point where you have a very management driven company and the time comes when it’s just right to sell, to let somebody have a little bite of the apple aside from us. We had created a lot of interest because [TGW’s] cash flows were growing 25% per anum, and our competitors were going by the wayside,” Moross said.

The TGW auction lasted several weeks and hosted 16 potential shoppers including buyout firms and strategic buyers. The Sportsman’s Guide was chosen as the auction winner in early May.

When Falconhead made its acquisition of TGW in late 1999, the online retailer was generating just over $6 million in sales. Last year, TGW’s annual sales were just shy of $50 million. The exponential growth in the company’s bottom line was the result of a 2003 recapitalization and an overhaul of its marketing strategy, Moross said.

Under Falconhead, TGW benefited from the firm’s partnership with IMG, a sports representation firm. IMG supported TGW with vendor relationships and access to professional golf players whose photos and quotes were used in the retailer’s print catalogue. The catalogue, created with the help of Moross, has been responsible for generating 30% of the company’s sales since its inception, he said.

Growth trends in Internet shopping and the sport of golf were factors aided the fast growth of TGW. Frugality also helped out a bit, Moross said. “Our management didn’t overspend on marketing when a lot of other companies did. A lot of similar enterprises went overboard with their ad ventures, placing expensive spots on ESPN. We put very little money into the company from the get go. The people who run this company are very entrepreneurial, very frugal, and rather than going overboard, they kept it right down the fairway.”