Deal Mechanic: Smelling of roses

Back in 2007, Cadum was a well-known French personal care company with a long heritage but a crippling lack of infrastructure. Enter mid-market specialist Milestone Capital… By Sam Sutton

Cadum knows all about babies.

The French personal care brand, which specialises in baby-care products, would no doubt agree that young children need to be nurtured, given the skills to succeed and ultimately granted the freedom to venture out into the wider world.

It turns out, however, that the same thing is applicable to portfolio companies, and to Cadum in particular: the company recently produced a 6x return for mid-market group Milestone Capital, after being bought by L’Oreal. The French cosmetics giant beat out several other bidders in a highly competitive auction process run by JP Morgan; the eventual price tag of €200 million was a healthy sum for a company that generated €58 million in revenues last year.

This might seem unsurprising, given Cadum’s long and venerable history (the company is over 100 years old), its strong brand recognition, its established presence in its core French market and a growth strategy that has seen it expand into three new countries in the last three years.

But as recently as 2007, it was a very different story. It has taken five years of serious operational improvement from Milestone to return Cadum to a level of performance befitting its pedigree…

FINDING A NEW PLATFORM

Five years ago, Cadum still had the long history and the brand recognition in France – but it was struggling to convert this to sales
 
“Cadum was already well known in France. In the street you would ask ‘What is Cadum?’ and they would say, ‘Baby products, soap brand’ – 90 percent brand recognition in the street, fantastic,” says Milestone managing partner Erick Rinner. “But then if you ask people, ‘Well, have you bought a product from them?’ they would say ‘No’.”
Milestone first came across Cadum and its management team in 2006, while exploring a deal for a different company. Three years earlier, the brand had been acquired (with no staff) from long-time owner Colgate-Palmolive by a pair of entrepreneurs, with the backing of CDC Enterprises and CIC Finance. But despite their best efforts – and those of the small team they had built up around themselves – they’d been unable to take the company to a level commensurate with their ambitions. At the time, Cadum was generating around €18 million in sales and €2.5 million EBITDA.

Part of the problem, according Rinner, was that the company had been largely ignored while under Colgate-Palmolive’s control. “It had been with the Colgate family for [50] years, and they had just neglected it,” he says. “I think that that’s the problem sometimes with global brands. They forget about the smaller, local brands and don’t give them enough attention.”

However, the current ownership structure was not making life any easier either, Rinner suggests. “I developed a good relationship with the CEO of Cadum … He said, ‘We’ve got a quality group of guys in our capital structure, but they’re French, they’re local, and they don’t understand we could grow more quickly.” As a result, he’d been thwarted in his efforts to inject more capital into the business, and also to hire the people he needed to build the business up.

By contrast, Milestone was intrigued by the company’s growth prospects.

Nevertheless, the company’s lack of infrastructure clearly posed a problem; building a platform of the requisite scale from scratch would have been prohibitively expensive and time-consuming.

So instead, Milestone spent six months looking for another company whose platform could be merged with Cadum’s. Eventually it settled on IBA, a niche air freshener provider; its growth prospects were limited, but its infrastructure, €20 million annual sales and €4 million EBITDA created a large enough platform to accomodate Cadum’s future expansion, Rinner says.

The firm acquired both Cadum and IBA in September 2007 for €50 million. Milestone’s equity contribution was €17.5 million, with Cadum’s management chipping in a further €2.5 million; the remainder was financed with a package of senior and mezzanine debt.

STAFFING UP

At the time of the Milestone acquisition, Cadum only had about 10 staff, all in marketing, purchasing and accounting. The company had outsourced most of its infrastructure to external service providers: formulation, logistics, sales and merchandising were all largely handled by outside groups, Rinner says. 

After the acquisition, the firm merged the companies’ internal operations and replaced its two external sales forces with a single internal one. No fewer than twenty-five sales professionals were hired to broaden distribution channels, and new executives were brought in to supplement Cadum’s existing management team.

“[Merging IBA and Cadum] was a good decision, not only for the business itself… We were in a better position to sustain our growth,” says Jacques Deret, who was brought in by Milestone as a non-executive chairman. Deret, a former executive at Sara Lee, was already familiar with the company, having assisted in the 2003 deal that extracted Cadum from Colgate-Palmolive.

The entrepreneurs who had led that deal stayed with the firm after Milestone took over – but they got some additional help. “We had two great founders – the guys were excellent,” says Rinner. “But they were doing everything. One was running around, running the business day-to-day. The other one was more the creator; he was running the marketing team… It was very small, very thin on the ground. We needed to get a professional team around these guys.”

In addition to hiring Deret, Milestone also created a six-person management committee, adding a financial director, a commercial director, a marketing director and purchasing director to the existing management pair. (The head of IBA, who was retiring, was not brought into the fold, Rinner says).

The new set-up paid dividends – quickly. The brand’s market penetration (i.e. their distribution in relevant stores) doubled to between 50 percent and 55 percent; within four years, it had jumped to 70 percent. In fewer than five years, the combined EBITDA of Cadum and IBA leaped from around €6 million at the time of the acquisition to €13.2 million in 2011.

That’s a serious change of pace – but according to Rinner, the existing management team embraced the change with open arms.

“It was quite smooth, because [the management] were frustrated … The management was quite lucid and very clear about the potential of what they could achieve, but didn’t have the means to do it. So the frustration level was very high,” Rinner says. “When we started, it was like freeing up athletes who wanted to run [but] were prevented from running. So it was like, ‘whoa’ – there was a big explosion of energy.”

LOOKING FURTHER AFIELD

Some of this energy was directed into new geographies. After spending two years building up Cadum’s distribution and sales resources in its home country, Milestone started casting its eye toward foreign markets.

Cadum had already ventured into new territory, so to speak, with the expansion of its product lines. In addition to developing a broader range of baby care products, Cadum created a new hygiene line for children between the ages of 5 and 12, as well as products for adults. Shower gels were distributed in larger bottles, to target family shoppers. And a greater emphasis was placed on natural ingredients in their products. 

The expansion was hurried along by a revived marketing campaign. Milestone used IBA’s mature EBITDA to reinvest into the Cadum brand, tripling the marketing budget over three years.

“[This meant] going to TV more, going to billboards. It was in existence before we came, but we also enhanced the annual election of the ‘Baby Cadum’,” Rinner explains. “It’s a contest in France. Every month they elect a baby through the internet; then at the end of the year there’s a grand finale, and they elect the baby of the year.”

According to Deret, convincing Milestone to invest heavily in marketing wasn’t always easy – but the increased visibility paid off. While France’s personal care market tends to run relatively flat, growing at a rate of 1 percent to 2 percent per year, Cadum’s growth rate was around 30 percent per year, Rinner says.

Through the development of new product lines, Milestone had opened the door to opportunities outside of France. The firm tested the international market in 2009 by expanding into Belgium through a distributor and, after seeing some success, decided to broaden its footprint by crossing the English Channel in late 2009. The company’s new intimate hygiene line for women was considered perfect for the move, as the firm believed the market for similar products was underdeveloped in the UK.

Less than a year later, investor appetite for Asia’s consumer products sector led the firm to undertake an even more aggressive expansion into Vietnam – where they quickly captured 15 percent of the baby product market.
“[Vietnam] was just a test market, and it was a good market. My view is that L’Oreal bought [Cadum] because it’s a great French brand; it’s a heritage brand with a fantastic image. But it has the potential to grow – if not global, then at least multinational,” Rinner says.

FINDING A BETTER OWNER

By early 2012, Cadum’s growth was starting to outpace Milestone’s capacities as a mid-market specialist. Sales had jumped from €18 million in 2007 to €58 million in 2011, with projections of €70 million in 2012.

“At the back end of last year, we felt that the business was going so fast… We had refinanced the mezzanine after two years. And we had repaid more than 65 percent of the senior debt. So we were doing very well,” Rinner says.

“[But] we felt that, as we were becoming one of the big brands in France, we were going to have to spend more and more. And you reach a point where you’re playing with real big boys – and we’re still a relatively small business.”
Under the aegis of L’Oreal, Cadum should have no such problems.

It may have been the right time to sell (and Milestone is unlikely to be complaining about the healthy return the deal generated). But it’s clear that the company would not have reached the sort of size that allowed it to take on these ‘big boys’ had it not been for Milestone’s strategy – which focused heavily on building the company up and achieving greater scale rather than engaging in financial engineering. 

“It was not about cutting costs. On the contrary, it was about investing in infrastructure, investing in people, building  a sales and marketing machine that could grow much more quickly than before,” Rinner says.