DEAL NOTES VERTBAUDET

Coming of age

In Vertbaudet, like Bruneau before it, Equistone sees a potential that others overlooked. By taking the time to truly understand this well-known French brand, we gained the confidence to support its transformation, writes Edouard Fillon.

APRIL 2022

OUR RECENT INVESTMENT in Vertbaudet turned heads in the French LBO market where the brand is well known, if not necessarily well understood. As an acquisition opportunity, Vertbaudet presented many complexities and this fact no doubt deterred many potential suitors. But Equistone is not put off by complicated situations. This may be a result of our firm’s long history in the French market, and a shared institutional memory.

As the Vertbaudet process was ramping up in the first half of 2021, my colleagues and I were busy preparing to realise our investment in Bruneau, a French B2B e-commerce player. When we acquired Bruneau back in 2017, it was an e-commerce business selling office furniture – a market that, like many others, was perceived to be vulnerable to the threat of Amazon. There was underwhelming interest in that asset when we bought it, but when we sold it last July to a large private equity firm (the same month that we acquired Vertbaudet) we were handing over a strongly performing company with a very bright future.

While in a very different sector – children’s clothing, homeware and toys, rather than office supplies – Vertbaudet shares several relevant characteristics with Bruneau. It is a well-known brand in France. It had a once-popular physical catalogue model (which stretches back to its foundation in 1964), and like Bruneau, has recently transitioned from this model to an e-commerce platform. Another similarity: Vertbaudet is operating in a market where some competitors are struggling, but has the potential to break from the peloton because of its strong management team.

Every business is unique, of course, but such experiences give us the confidence to look beyond simplistic reasons to disqualify a prospect. For Vertbaudet, such complexities included a legacy association with catalogues and its exposure to retail amid the skittish economic environment of 2021. The brand is widely known across France due to a legacy bricks-and-mortar presence.

On top of this was the fact that Vertbaudet was part of a corporate group with Cyrillus (a French clothing brand), and the two companies were being sold separately, involving a corporate carve-out situation, which always carries risk and uncertainties.

Then there was its credit record. The overall Cyrillus-Vertbaudet Group had gone into conciliation proceedings a few years before, which had affected its reputation in the banking market.

Finally, the whole financial picture was confused by what seemed to be an obvious ‘red herring’. A huge bump in online sales during the Covid pandemic. Tying that to future trading prospects, or rather unpacking it from underlying growth trends, was a challenge few had an appetite for.

But what nobody else seemed to realise was that the Vertbaudet Group of 2021 bore no resemblance to the one of 2013. It was a completely different opportunity.

Second time round

I joined Equistone in 2017, so 2020 was my first look at the business, but given its reputation in the market, I was aware of the brand and my deal colleagues, Arnaud Thomas and Grégoire Schlumberger, knew the business from its previous pass on the deal carousel.

The first major difference in 2021 was that Vertbaudet was being sold as a stand-alone business. While Cyrillus is a fashion brand, with all the risk that entails, Vertbaudet is a true distributor with a diversified product offer and, as such, is able to adapt to changing fashions – it had therefore become an entirely different risk proposition.

Another crucial difference: in 2015, as Vertbaudet was negotiating with its creditors, the company recruited a new CEO, Thierry Jaugeas, who is now chairman and a first-rate business leader. He launched a very deep transformation of the group, moving it from catalogue to digital. That is easy to say – it’s not easy to do. We regularly see examples of it done poorly. But Thierry had managed to transform Vertbaudet into a true e-commerce player. He significantly reduced the catalogue business and converted 80% of sales to online. The whole organisation became focused on e-commerce. When we analysed the business in 2020, Arnaud and Grégoire, who had looked at the business a few years before, were impressed to see the difference.

CLOCKWISE: Thierry Jaugeas, Mathieu Hamelle, Grégoire Schlumberger and Arnaud Thomas.

While Thierry Jaugeas was CEO of the combined group, he was choosing to stay with Vertbaudet, which was the larger business and was experiencing positive dynamics. However, he remained in charge of both sales process and the carve-out and transaction services agreements between the two entities. We managed to meet up with Thierry in person, before the second French lockdowns were imposed, and this time was invaluable in truly understanding the asset. The fact that he had such a good overview and grasp of the complexities involved in the transaction was a comfort.

Assessing the business’s performance and prospects was made complex for two reasons: firstly, the company had been in full transformation mode into a digital player for nearly five years, so comparison was quite a challenge. On top of this, just as the digital transformation was bearing fruit, the Covid crisis hit. What followed was a poisoned chalice faced by many sales processes: a huge increase in turnover during 2020 that was tainted by a one-off extraneous factor. The CEO was adamant that the transformation had started to show results at the end of 2019, prior to the ‘Covid bounce’.

As dealmakers, our main task was therefore to analyse whether 2020 was a one-off, or, as the CEO was telling us, it was just an acceleration of a fundamental, sustainable growth trend. Nobody, not even the vendors, were claiming the 2020 growth rate was normative – it was obviously very strong. But that is a different question to the one we asked ourselves: whatever may be the attribution to Covid, can we grow the business from here?

We had very long discussions with our advisers, the management and our own Investment Committee on this point. Was the level of activity we thought we were buying sustainable? If not, what was the right level of activity on which to attach a value?

Ultimately, we ended being convinced by the CEO based on the fact that the positive dynamics had indeed started before Covid. It had accelerated significantly in 2020, but we believed the group would be able to grow from that point. In the end, we projected a sustainable level for 2021 that was slightly higher than 2020, but lower than management forecasts – and we used this to calculate our offer. (As it turns out, the full year 2021 will be far above the level we used at the time of the transaction.)

Sometimes, impossible questions are just the wrong questions. Nobody could fully extract the Covid performance from the business transformation benefits, but we realised that what really matters is whether the company can take its good fortune and build on it. Can it retain the large number of customers it managed to recruit? These customers may have come to Vertbaudet because other shops were closed, but they stayed because they were happy. Such business-specific questions can be credibly assessed.

Sale process

Gaining sufficient confidence to close this transaction required time and energy. When the process started in early March 2021, we knew that the complexity of any deal meant we would need to gain exclusivity. Thierry Jaugeas clearly indicated to the sellers that Equistone was his preferred choice and he wanted to deal with us. Looking back this was key to winning the transaction, because it gave us the confidence to define a fixed price with the sellers and secure that exclusivity period.

As we anticipated, attracting a lending syndicate was not straightforward. Few lenders look favourably on a company that has just finished a renegotiation process on its old debt. And for most, the performance of 2020 was ‘just Covid’, and so they offered finance based on 2019 results. In the end, we assembled a pool of French banks led by BNP (which also provided finance for Bruneau and Courir.) The discussions were quite tough but resulted in a very reasonable package, with very reasonable leverage levels, and debt that is in the hands of French banks that we know.

Succession

There was one other, rather significant complexity that I have yet to mention: Thierry Jaugeas, the CEO who had led the spectacular transformation of the group, wanted to progressively step down and handover to Mathieu Hamelle, who he had recruited at the start of 2020. On our side, we didn’t want to lose all the great work he had done.

For us it was essential he reinvest a significant part of his proceeds and that he stay in the business as chairman and mentor to the new CEO, and this meant we were fully aligned. He now remains in charge of the transformation of logistics and IT. The dynamic we witnessed between the chairman and CEO was very positive and convinced us that the transition period would be done smoothly.

What’s next

The company has spent recent years closing many of its stores, but we have no plans at this point to close more. Digital is the future, but it is interesting to retain a multi-channel strategy.

Looking ahead, we see many opportunities for growth, including product expansion beyond apparel and further into existing categories such as toys, home and care products. Further international expansion is also contemplated. The business has encouraging growth in Germany, Switzerland, Belgium, Spain and Portugal as well as a small presence in the UK. Germany, in particular, is growing at a handsome rate. We are now exploring opportunities in other European countries.

We will support Vertbaudet as it exploits all these opportunities, and we think the challenges and complexities of the past that haunted this process will become ancient history. By the time our investment period matures, future bidders will see a stand-alone, independent business, with a trading record uncomplicated by Covid and a solid reputation among financing parties.

Anyone can see what is in front of them. With Vertbaudet, as with other deals in Equistone’s past, we chose to see what could be there: the potential of a well-run business that is focused, not on the past, but on the promise of a bright future. ☐

A full version of this article appeared in PLATFORM 06, Winter 2021/22