MIDDLE MARKET DEAL OF THE YEAR: Irving Place Capital
Firm: Irving Place Capital
Target: Vitamin Shoppe
Price: $305 million, or 7.6x EBITDA
Return Multiple: 3.6x invested capital
Advisors: JPMorgan Chase, Bank of America-Merrill Lynch and Barclays served as underwriters on the October 2009 IPO.
Inclined to think of buyout pros as slash-and-burn capitalists who eliminate jobs and squeeze R&D budgets in the pecuniary name of boosting ROIs over tiny holding periods? Then read no further about this “Deal of the Year” award-winner.
Under the ownership of
Of course, aggressive expansions have been the undoing of many a retailer—and, in fact, Irving Place Capital, early on in its stewardship, did turn down the burner on the growth rate after the company started getting black around the edges. But last year the public equity markets determined the sponsor eventually got the temperature just right. Between a late 2009 IPO, secondary offerings last year, and remaining holdings as of year-end, Irving Place Capital rang up a 3.6 multiple of its original $121 million equity investment.
Irving Place Capital acquired Vitamin Shoppe back in 2002 for $305 million. The controlling shareholder, fellow sponsor
The rapidly-growing company didn’t come cheaply. The purchase price multiple weighed in at about 7.6x EBITDA—a healthy price for retailers at the time. Lenders pitched in 4x, and the equity investors, including founder and CEO Jeffrey Horowitz (existing management held 11 percent of the equity) and FdG Associates (which kept a minority stake), put up the rest.
But Irving Place was riding high from its ownership of specialty retailer Aéropostale. Over the prior four years, the firm helped convert the company to a nationwide chain that is still publicly traded under the ticker symbol ARO. And Doug Korn and Rick Perkal, senior managing directors at Irving Place Capital and the two lead partners on the deal, thought they saw a similar opportunity in Vitamin Shoppe to take a local retailer nationwide.
Among the factors Irving Place weighed at the time of the buyout, market research showed that the overall vitamin and supplement market, while susceptible to individual product fads, had grown steadily for decades and would benefit from a consumer trend toward healthy living. Second, research on potential new markets showed that the company should be able to lease space in prominent locations visible to people on their drives home from work—an approach to real estate that Irving Place Capital calls “main on main.”
Finally, and perhaps most important, the company’s own direct sales data demonstrated demand for Vitamin Shoppe products well beyond its roots on the East Coast. Indeed, the data practically provided a roadmap for its expansion. Direct orders were flooding in at the time from California and Texas. Those became the first states the company expanded into on the retail side after the acquisition by Irving Place Capital. Today more than one in 10 company stores, over 50 altogether, are based in California.
Irving Place Capital owes much of its success on the deal to the management team. Korn and Perkal point to their ability to attract talent both to the management team and the board as their single biggest contribution. After Horowitz retired around 2005, the company recruited a senior management team that included Rick Markee, who had previously served as president of Babies “R” Us, and Tony Truesdale, who had served in senior positions at PetSmart and Sainsburys. (Truesdale, who joined as chief merchandizing officer, became CEO of Vitamin Shoppe this month.)
It wasn’t a completely smooth ride to post-IPO bliss. Perkal said the company rolled out about 60 stores in the second year after its acquisition, which in hindsight turned out to be too many. The company couldn’t handle the pace, and “the first-year performance of those stores was not satisfactory,” said Perkal. After the company ratcheted back the open rate to 30-40 per year, however, the company “came on like gangbusters,” he said.
In the period leading up to the October 2009 IPO, a period that saw the financial crisis and the Great Recession, same-stores sales grew for 15 quarters in a row. By the time of a secondary offering in late 2010, Vitamin Shoppe was generating annual EBITDA of $80 million on revenue of $734 million.
Korn and Perkal like to point out that Vitamin Shoppe’s was the first retail IPO on the New York Stock Exchange in nearly two years. It helped set the stage for subsequent public offerings, including that of Rue21 the following month.
They’re also proud to do their part in building up the industry’s reputation as a job-creator. Every dollar of free cash generated was reinvested in the business over an eight-year holding period, said Korn. “This is an example of the private equity model really working to help build the business.”
WHY THE FIRM WON
• Risked overpaying for a regional retailer in a fad-prone industry (vitamins and supplements) at a time of economic weakness.
• Wisely took advantage of direct sales data to plot a bricks-and-mortar expansion strategy.
• Brought in first-class talent to the management team and board to ensure the strategy would be executed properly.
• Oversaw a growth strategy that saw the company add nearly 2,500 jobs at time the industry was under fire for starving companies of resources and jobs