These days, the word “big” is a relative term for PE professionals. In a new semi-regular column, I’ll explore how the some of the biggest (or at least most interesting) deals are getting done.
Today’s Big Deal (Kind Of) goes to Vestar Capital Partners. The firm inked a $1.45 billion deal for Unilever’s North American laundry business in a transaction that embodies several of the trends I’ve been seeing in credit crunch era deals: seller financing, strategic partnership/add-ons, larger equity checks, and “have to sell” corporate divestitures. Details below.
As with the Blackstone/Bain/NBC purchase of The Weather Channel from Landmark Communications, Unilever is another corporate seller who had no choice but to sell. The UK consumer products conglomerate announced its reorganization plans, which included divesting Boursin cheese and Lawry’s seasoning salt among others, more than a year ago. NA laundry went on the block almost that long ago, with books going out around the beginning of October.
This deal had Vestar’s name written all over it from the start. Interest from the logical strategic buyers was lackluster, since few were looking to go up against leading detergent maker, Procter & Gamble. Financing difficulties, combined with the overhead costs associated with a carve-out, made PE buyers unlikely.
But in another parallel to The Weather Channel deal, Vestar had strategic power—the buyout firm owns the country’s largest private label detergent manufacturer, Huish Detergents. So, Unilever’s need to sell, plus Vestar’s strategic synergies, led to not only a rational price (in the rough neighborhood of 5X EBITDA), but a rational leverage ratio (under 5X leverage for the combined business).
Huish retained its original senior debt vehicle, a bank financing led by JPMorgan. So, for the Unilever add-on, GE Commercial Finance provided incremental senior notes. GE also provided mezzanine debt. Further, the deal used seller financing, in which Unilever takes $375 million worth of preferred shares in the new company. Keeping the existing senior debt in place was an important step, a source familiar with the deal said.
Other Key Takeaways (based on my conversation with Brian Ratzan, a managing director at Vestar):
-The business is strong enough to be levered more than 5X, but Vestar decided to hold back, given the state of the economy.
-The combined company, named Sun Products Corporation, will be the second largest in its category (trailing Procter & Gamble, but taking the number two spot from Clorox). Ratzan declined to comment on anti-trust concerns, suffice to say that Sun Products Corporation with be a “strong but distant” number two to P&G.
-Vestar would not have been interested in the business if it didn’t already own Huish. The back office/overhead investments involved in carving out such a large business from a corporate parent would have made the deal unattractive.
-The firm has lined up a crack team of execs led by Neil DeFeo, who you may remember ran Playtex before selling it to Energizer last summer, and before that worked at Remington Products (a Vestar company), Clorox and P&G.