Turnaround Deal of the Year: Ares Management and Savers Value Village

“The scope of thrift is limitless,” Thomas Edison once said.

So it seemed last summer when – in the midst of an IPO drought – Savers Value Village, a for-profit thrift chain majority owned by Ares Management, debuted on the New York Stock Exchange.

Anchored by two institutions, the offering was oversubscribed, allowing for higher pricing and a 20 percent upsizing. With shares soaring on a first day of trading, growing Savers’ market cap to almost $4 billion, Reuters reported, the IPO fetched more than $400 million.

Remarkably, Savers was only a few years earlier facing headwinds. In 2017, it was burdened by depressed earnings, weak liquidity and an untenable capital structure, according to Moody’s Investors Service, casting doubt on the company’s ability to meet 2019 debt maturities.

The situation owed to multiple factors, Moody’s said, such as the effect of a strong US dollar on foreign operations, a drop-off in the recycling business, and decreases in Savers’ Apogee Retail stores, acquired in 2011.

To the rescue

Rescue, however, was at hand. In 2019, Ares’ private equity group, alongside Crescent Capital and KKR, recapitalized Savers through a $540 million first-lien term loan, a $50 million PIK second-lien term loan and $165 million of new equity.

With the deal, Ares became a minority owner, partner Aaron Rosen tells Buyouts, giving the firm a first-hand look at Savers’ inner workings. “There’s a real advantage when you’re able to do due diligence from the inside,” he says.

Rosen found the company’s headwinds “were transitory.” More important, he concludes, were its “strong secular tailwinds,” something the entire thrift industry was seeing thanks to durable consumer demand for low-priced, second-hand goods and rising environmental awareness.

$400m

Amount fetched by Savers Value Village for its IPO last year

Savers emerged in the 1950s, when thrift bargains were drawing more shoppers – among them high-end shoppers big on vintage clothes and accessories. To tap into demand, it built a potent supply model rooted in donations of textile and household merchandise, including from non-profit partners.

It also started a recycling program to keep reuseable goods from ending up in local landfills. This, combined with the recession-resistant nature of demand, fueled decades of growth. Savers is today the largest for-profit thrift chain in North America, operating some 324 stores.

From recap to turnaround

Spotting upside potential, Ares embarked on a turnaround strategy. This began during the 2019 restructuring and continued through pandemic-roiled 2020, when the firm added to its equity interest by bolstering Savers’ liquidity. The following year, it assumed full ownership by acquiring Crescent’s stake.

Ares’ strategy emphasized business optimization, Rosen says. Savers was formerly “managed for sales and volume growth,” with less attention paid to profitability and yield. “How to better manage growth,” he says, was key to turning it around.

Working with CEO Mark Walsh – an apparel retail veteran hired in 2019 – and his team, Ares launched several value-creation initiatives. They included implementing centralized production, aimed at reducing labor spend and increasing topline growth, and enhancing financial and working capital controls.

Ares and management also perceived “a significant whitespace opportunity” of roughly 2,200 new stores, Rosen says. Against this, the firm supported execution on new store rollout, plus creation of a multi-layered marketing approach.

In addition, Ares helped Savers identify M&A opportunities in a fragmented thrift industry. This led to the company’s acquisition in 2021 of 2nd Ave Stores, along with its GreenDrop system of drop-off donations, for $239 million.

Taken together, value-creation initiatives had as of September 2023 resulted in growth in Savers’ adjusted EBITDA to $318 million from $124 million, as well as growth in enterprise value to $3.7 billion from $792 million.

Going into the IPO, Rosen says, the market saw in Savers “one of the only large thrift chains at scale” possessing “a differentiated business model” and a proven commitment to sustainability.

For Ares, which remains Savers’ majority owner, the payoff was equally rich. In the IPO, it realized about $116 million in gross secondary proceeds, bringing total gross proceeds as of December 2023 to about $939 million, awarding the firm a gross multiple of 3.3x and a gross IRR of 50.1 percent.

Joining Ares in 2018, Rosen is co-portfolio manager of its special opportunities strategy. He was recently appointed co-head of opportunistic credit.