Consumer Products and Services: McGladrey® Quarterly Private Equity Deal

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4Q 2012

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” Focusing on the middle market.1272 carol.grossman@mcgladrey.1225 jeff. Well-established brands can easily distinguish themselves.1184 cristin. which is paramount in capturing market share and demanding a price premium over competitors. there is a high level of uncertainty for PE investors in the B2C industry.1570 michael. assurance and consulting [1] [1] www.singer@mcgladrey.pitchbook.1235 don. Our work with thousands of consumer products.” says Michael Grossman. While activity is down across all of www. Transaction Advisory Services McGladrey LLP 312.634. Moving into the last quarter of the year. director of Retail and Consumer Advisory Services at McGladrey.372. but it continues to just kind of plug along. “A lot of private equity firms are going back to their investors and asking them to delay the window to return capital because they haven’t been able to put anything to work.spizman@mcgladrey. Donald A. but they are also the ones that we’re seeing growth in because they are differentiating William Spizman Partner.100 private equity firms gives us a deep understanding of the key trends impacting deal flow in the B2C industry.372. Transaction Advisory Services McGladrey LLP 212.lipari@mcgladrey. according to the McGladrey team. Lipari National Executive Director. McGladrey provides PE firms and their portfolio companies with integrated transaction advisory.372.Consumer Products and Services McGladrey announces the 4Q 2012 Private Equity Deal Flow Profile Judging by their investment activity. they go away.” says Jeff Edelman. private equity (PE) professionals do not harbor much optimism about the health of the general economy or consumers. “When investors in general are concerned about the outlook for the consumer.372. food and beverage companies and 1. “Fourth quarter is a big question mark. Exits have shown some signs of life.372.8 billion across 66 deals in the consumer products and services (B2C) industry in 3Q 2012 as deal volume fell 24 percent from the previous quarter.4422 william. principal of Transaction Advisory Services at Michael Grossman .com Carol Lapidus Consumer Products Practice Leader McGladrey LLP 212.” says Carol Lapidus. but the prolonged slowdown on the deals side remains worrisome. The tumultuous investing climate and a lack of quality deals have begun to take their toll on the industry. “If you’ve got a strong brand. Retail and Consumer Advisory Services McGladrey LLP Cristin Singer Food and Beverage Practice Leader McGladrey LLP 212. Firms invested just $9. “We keep saying this every quarter.” Edelman claims. it has the characteristics of generating the kind of growth that the private equity groups are looking for.” Edelman observes. the Consumer Products practice leader at McGladrey. companies with strong brands continue to be an area of interest for investors.edelman@mcgladrey. tax. “The brands are more attractive to the private equity firms. waiting for the other shoe to drop.mcgladrey. Private Equity Services McGladrey LLP Jeff Edelman Director.

” B2C private equity deal flow by year $250 $200 $150 386 $100 $50 $530 648 782 602 [2] 900 800 700 514 416 424 600 500 400 331 238 300 200 100 0 $49 $68 $100 $105 $204 $115 $30 $69 $70 $33 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* * As of 09/30/2012 Capital invested ($B) # of deals Source: PitchBook Edelman observes. “PE firms have kind of shied away from [B2C].8 billion invested in 66 deals. waiting for the next recession. The lack of PE investment would seem to suggest poor performance from companies in the B2C space. Since a strong showing with 133 deals and $29.3 billion invested in 4Q 2010. www.” Grossman observes. so the expectation is that the rate of increase of sales is going to slow. but 3Q 2012 marked a new post-crisis low with just $ . Barring a miracle in 4Q. investors will have a hard time staying away from B2C companies if they continue to exhibit strong performance.” Edelman claims. we are seeing more and more deal volume. Why buy into something that is slowing where you are undoubtedly going to have some pressure on margins?” Despite the recent slowdown.Consumer Products and Services B2C private equity deal flow B2C private equity deal flow by quarter $70 $60 $50 $40 $30 $20 $10 $- 198 196 195 193 167 131 101 115 92 72 87 97 110 133 104 116 106 85 98 200 150 80 87 100 76 66 50 $48 $44 $51 $62 $49 $13 $43 $10 $8 $5 $7 $10 $10 $23 $7 $29 $22 $13 $20 $15 $12 $11 $10 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2007 2008 2009 2010 2011 2012 Source: PitchBook 0 Capital invested ($B) # of deals Deal-making in the B2C industry has been dwindling for several quarters. as opposed to fundamentals and performance.mcgladrey. quarterly deal volume has been cut in half and capital invested has fallen by two-thirds. “Economic headwinds are pretty gloomy and employment is not growing fast enough. “there seems to be some good buying opportunities out there.pitchbook. To that end. It also seems hard to imagine that deal-making could get any slower given the large stockpiles of dry powder waiting on the sidelines. and as a result I think other consumer sales would be on trend as they were earlier in the year. It appears that macroeconomic conditions and continued uncertainty have been the main factors for PE investors executing fewer deals in the B2C [2] [2] www. “Most of the retailers had a pretty good August and a decent September. 2012 will be the weakest year for B2C deal-making since 2009. but the McGladrey team tells a different story.

Brands continue to play an integral role in the success of B2C companies. activity across the B2C industry has been distributed quite evenly so far this year. Some of the 3Q deals in this space include Benihana. the sector’s share of capital invested has plunged from 14 percent in 2011 to just 2 percent so far in 2012. media. so it is a bit surprising to find that consumer nondurables have slid from 21 percent of deal flow in 2011 to 16 percent so far in 2012. Foodstuffs are consistently pointed to as being one of the most resilient areas of the B2C industry. the decline in deal-making may simply be a function of the fact that there are not as many attractive investment opportunities as there once were.” says William Spizman. Investment in the consumer durables space has been noticeably absent in 2012. partner of Transaction Advisory Services at McGladrey. jumping from 10 percent of capital invested in 2010 to 35 percent so far this year. “There is a lot of capital on the sidelines looking for a good deal. Capital invested details Median deal size ($M) $120 $100 $80 $60 $40 $20 $0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* * As of 09/30/2012 PE transactions ($ amount) by sector 100% 80% 60% 40% 20% 0% 2007 2008 2009 2010 2011 2012* * As of 09/30/2012 Other Transportation Services (nonfinancial) Retail Restaurants. including restaurants and health centers. the median buyout size has returned to a more manageable level of $61.F. With more reasonable valuations and investors sitting on large reserves of capital. Talbots and Sundance Catalog. The sector continued its strong performance in 3Q. One area where this is most evident. The durables. nondurables. [3] [3] . Retail has been attracting the lion’s share of PE dollars in the B2C industry in recent years. Gains have also been seen in media. with retail following closely with 14 percent. and which has seen an uptick in activity. and restaurants. P. The increasing attention being placed on franchised businesses is evidenced by the expansion of restaurants.5 million through the first three quarters of 2012. JRG Fitness (Snap Fitness). hotels and leisure 15% Source: PitchBook Source: PitchBook With the exception of a few sectors. which has grown from 13 percent to 16 percent of B2C deal flow during the same period. Curves International. the buyers will pay up for it. and when you have a good deal. hotels and leisure Media Consumer nondurables Consumer durables Apparel and accessories * As of 09/30/2012 Apparel and accessories 3% Consumer durables 18% Transportation 9% Services (non -financial) 9% Retail 15% Restaurants.Consumer Products and Services Deal flow details Deal activity in 3Q 2012 by sector Consumer nondurables 14% Media 17% PE transactions (count) by sector 100% 80% 60% 40% 20% 0% 2007 2008 2009 2010 2011 2012* Other Transportation Services (nonfinancial) Retail Restaurants. is franchised businesses. with high-profile deals for Party City. hotels and leisure sectors have all accounted for 16 percent of deal flow. Chang’s and Tappan Street Restaurant Group (Taco Mac). hotels and leisure from 12 percent of deal flow in 2011 to 16 percent so far in 2012. hotels and leisure Media Consumer nondurables Consumer durables Apparel and accessories * Buyout Growth Source: PitchBook Source: PitchBook After spiking to $110 million in 2011.

Select B2C 3Q 2012 transactions Company Name Party City [4] [4] www.mcgladrey. so it may simply be that investors are unable to find businesses [4] that complement their current portfolio companies. add-on deals tend to make more sense for well-established strategic acquirers as opposed to investors with a more financial bent.pitchbook. hotels and leisure Apparel and accessories Retail Restaurants. Since 2006. add-ons have accounted for 40 percent of B2C buyout activity on average. As investors manage the challenging investing climate. Lee Partners Centerbridge Partners Angelo Gordon & Company Avista Capital Partners Partners Group Sycamore Partners Wheelock Street Capital Golf Town OMERS Private Equity Capital Dynamics North Castle Partners Cortec Group Camden Partners The Gladstone Companies The Comvest Group Sector Retail Restaurants. Add-on deals have never been a primary driver of investment in the B2C industry due to the high premium placed on brands. but they now represent less than a third (32 percent) of all buyouts. With the high premium placed on brands.690 $918 $297 $200 $193 $107 $97 $70 $58 $56 $23 $19 www. but this simply has not been the case. It is important to keep in mind that add-on deals are opportunistic in .F. Chang’s China Bistro Benihana Strategic Partners Talbots Sunstone Hotel Investors (3 assets) Golfsmith International Curves International Harmar Mobility New Horizons Worldwide Ginsey Home Solutions Karmaloop Investor Thomas H. hotels and leisure Retail Restaurants. hotels and leisure Consumer durables Services (non-financial) Consumer durables Retail Amount ($M) $2. hotels and leisure Restaurants.Add-on deals in the B2C industry Add-on deals as a percentage of buyouts 180 160 140 120 100 80 60 40 20 0 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2006 2007 Add-on 2008 2009 Non add-on 2010 2011 Source: PitchBook 2012 60% 50% 40% 30% 20% 10% 0% Add-on % of buyouts Source: PitchBook The total number of buyouts dipped to its lowest level in more than six years during 3Q 2012 and pulled down the total number of add-ons along with it. one may expect to see an uptick in add-on deals with PE firms looking to improve their existing platform companies. according to the team at McGladrey.

the most since 4Q 2011. the team at McGladrey was surprised that exit activity was not even higher due to the large backlog of PE-backed companies and the possible tax implications if a resolution about the fiscal cliff is not reached by the end of the year. media grew from 9 percent to 26 percent.Consumer Products and Services Exit activity in the B2C industry B2C private equity exits (count) by exit type 50 45 40 35 30 25 20 15 10 5 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 2006 2007 2008 Corporate acquisition As PE deal-making in the B2C industry has been declining over the last several quarters.” Spizman claims. Interestingly. transportation went from 13 percent to 2 percent and consumer durables jumped from 4 percent to 16 percent. a space we highlighted earlier in this report. “I think a lot of people’s minds are focused on trying to sell their businesses. we are seeing an increasing focus on secondary buyouts as both an investment and exit strategy. but as you talk to investment bankers. Investors executed 14 secondary buyouts in 3Q 2012. As with other areas of PE. 3Q 2012 was the best quarter for B2C exits since 4Q 2007. B2C private equity exits in 3Q 2012 by sector Services (non-financial) 9% Transportation 2% Apparel and accessories Retail 23% Restaurants. three of the four B2C private equity exits (count) by exit type 100% 80% 60% 40% 20% 0% 2009 IPO 2010 Secondary buyout 2011 2012 Source: PitchBook companies are food-related franchises. the most since 4Q 2009.” Four PE-backed B2C companies completed IPOs during 3Q 2012. “It’s kind of a mixed message that’s out there. Several sectors saw their proportion of exit volume shift substantially from 2Q 2012: consumer nondurables fell from 31 percent to 9 percent of activity. the opposite phenomenon has been seen on the exits side. Still. they’re saying that their pitches are down. With 38 transactions. hotels and leisure 12% Consumer durables 16% Media 26% 3% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* Corporate acquisition * As of 09/30/2012 IPO Secondary buyout Consumer nondurables 9% Source: PitchBook Source: PitchBook [5] [5] . apparel and accessories dropped from 13 percent to 3 percent.

3 [6] [6] www.3 Hotels and Resorts 2.4 Household Appliances 2. Hotels and Leisure 2.6 Other Consumer Durables 2.2.7 Services (Non-Financial) Rail Social Content 2.pitchbook.2 Department Stores 2.4 Real Estate Services 2.4.2 Electronics 2.4.3 Consumer Non-Durables .5.4. Consumer Products and Services (B2C): 2.2 Food Products 2.3 Distributors and Wholesale 2.7.3 Legal Services 2.5.7 Other Retail 2.9 Other Consumer Products and Services 2.5 Other Services (Nonfinancial) 2.8 Transportation 2.6. Music and Entertainment 2.2.1 Apparel and Accessories 2.2. Hotels and Leisure 2.1. Audit and Tax Services Radio and Television following list shows a detailed breakdown of the PitchBook industry codes for the consumer products and services industry.6 Other Restaurants.3 Home Furnishings 2.5 Restaurants and Bars 2.5 Other Apparel 2.8.1 Accounting.1.6 Retail 2.1 Air 2.5 Recreational Goods 2.2.4 Publishing 2.4.5 Other Consumer Nondurables 2.4 General Merchandise Stores 2.6.2 Clothing Business Equipment and Supplies 2.2.2 Consumer Durables 2.8.2 Information Services 2.8.3.mcgladrey.4 Leisure Facilities 2.7.1 Accessories 2.4 Personal Products 2.5.5 Other Transportation 2.2 Cruise Lines 2.2 Automotive 2.5 Restaurants.6. 2.3 Footwear 2.6 Specialty Retail 2.6.4 Luxury Goods 2.3.2 Educational and Training Services 2.3 Marine 2.1 Other Consumer Products and Services [6] www.6 Other Media 2.5 Internet Retail 2.4 Media 2.1 Casinos and Gaming 2.1 Catalog Retail Broadcasting.3 Household Products 2.1 Beverages 2.

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