Howard Roark is a character in Ayn Rand’s famous book The Fountain Head. To Neal Aronson, president and founder of Atlanta-based Roark Capital Group, Howard Roark embodies someone who sticks to his beliefs, even if he goes against conventional wisdom. If sometimes he suffers for it, eventually he prospers. Hence, the name Roark Capital.
Aronson established Roark Capital Group last April, in a year that saw the lowest buyout deal volume in five years. Therefore, instead of raising a fund, Aronson, who began his career in the corporate finance department at Drexel, Burnham, Lambert Inc. where he participated in more than $4 billion of debt and equity capital raises, decided to rely upon his contacts to find and finalize transactions on a deal-by-deal basis.
“We can move much quicker that way,” said Aronson, adding that Roark’s investors are multi-billion-dollar investment funds, wealthy families and the personal funds of major private equity investors.
The firm recently purchased Carvel Corp., an ice cream distributor and franchiser, for $30 million.
“For the Carvel deal, within a week we had the entire money committed,” Aronson said.
Roark Capital Group purchased preferred stock that is convertible into a majority ownership stake in Carvel while Investcorp, the previous owner, invested additional equity while retaining a minority position in the ice cream maker. As part of the transaction, Aronson becames chairman of the board at Carvel.
Aronson listed several reasons for the purchase, beginning with his own firm’s investment strategy, which is to focus on acquiring multi-unit businesses and brand management companies.
“Carvel is a well-known brand name. It has 98% brand awareness in the Northeast region and a 90% intent-to-repeat purchase, which means people like the products,” he said. Also, Carvel has a steady and growing cash flow, at 19% this year, and recession-resistant earnings. Seventy-five of company’s sales are ice cream cakes for birthdays and special occasions; 25% in $2-to-$5 fountain products, or impulse buys, such as cups, cones, sundaes and shakes.
“In a good or bad economy, these are some of the last things to go,” Aronson said.
Additionally, consumer trends back Carvel.
“Frozen yogurt peaked in 1996 and sales have declined 5% a year since. Also soft serve [ice cream] sales have increased 16% a year since then. Ice cream is outselling frozen yogurt, and Carvel is the only branded ice cream cake in the grocery market” something Aronson plans to capitalize on, he said.
Carvel has 40% annual growth in the grocery segment. [The brand] is in 5,100 stores over 25% of the country and sells more than 6 million ice cream cakes per year.
“By putting additional cash in the company, we can take a very highly regarded brand, a product people like, national. Carvel has the capability to gain national distribution,” he added.
Aronson said believes the Carvel story is reminiscent of the recent success Krispy Kreme Doughnuts, originally merely a well-liked brand located in a handful of Southern states “that someone saw the potential in to take national.” Today, the company runs a chain of more than 210 shops in 33 states; it also sells to grocery and convenience stores.
Which is why in terms of distribution, Roark Capital is focusing on growth in franchise and food service locations, an area, where Aronson has operational expertise.
Just before founding Roark Capital, Aronson was a co-founder, executive vice president, chief financial officer and a member of the board of directors of U.S. Franchise Systems Inc. (USFS), a franchiser in the lodging industry. In five years, USFS grew from 27 franchised hotels in nine states into the tenth largest hotel franchiser in the country with more than 1,100 properties open or under development in 50 states and five countries. At USFS, Aronson raised $94 million of equity securities in three traunches a private placement, an initial public offering and a secondary offering. USFS was sold in November of 2000, earning its private equity investors an internal rate of return over five years in excess of 80% per annum.
Likewise, Aronson wants to reinvigorate Carvel’s franchising effort. Roark will direct its efforts to co-branding Carvel kiosks and individual ice cream machines in high traffic locations such as fast food restaurants, movie theaters, stadiums, airports and malls. Today the company operates at Universal Studios, Shea Stadium, Miami’s Joe Robbie/Pro Player Stadium, Qualcomm Stadium, the Meadowlands Sports Complex and Raymond James Stadium.
Aronson says Roark also plans to increase the resources available to the company for its sales, marketing, service and research & development teams. Roark will actively participate in management decisions.
Roark Capital Group is a private equity firm focused on acquiring majority stakes in multi-unit businesses (both franchised and store ownership), brand management companies, and manufacturing, distribution and services businesses. Specializing in middle market transactions with enterprise values between $40-$250 million, Roark Capital Group targets family-held businesses, orphaned assets (divisions of public companies or portfolio companies of private equity firms) and “going private” transactions for micro-cap public companies in management buyouts, industry consolidations, recapitalizations and growth equity opportunities.
Prior to USFS, Aronson worked at various private equity and investment banking firms in New York. Aronson was a principal of Odyssey Partners, L.P., a private investment partnership founded by Jack Nash and Leon Levy with equity capital exceeding $2 billion, where he proposed offers related to five companies with aggregate funding requirements in excess of $2.1 billion. Preceding Odyssey, Aronson was the youngest principal and general partner at Acadia Partners L.P., a $1.7 billion investment partnership whose founding partners included the Robert M. Bass Group, the American Express Companies and the Equitable Life Assurance Society. While at Acadia, Aronson completed five acquisitions valued at approximately $550 million.
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