KKR buys 1-800 Contacts for $3.1bn-plus as eCommerce and telemedicine take off

The deal provides an exit for AEA Investors and Thomas H. Lee, more than four years and six years into their investments, respectively.

AEA Investors and Thomas H. Lee Partners have locked down a buyer for 1-800 Contacts, selecting KKR as the winning bidder in a deal valued between $3.1 and $3.2 billion, according to sources familiar with the matter. 

Prior to the sale, New York’s AEA was a majority investor in 1-800, while Boston’s THL held a 20 percent to 30 percent stake, some of the people said. 

PE Hub wrote in early August that the nation’s largest online retailer of contact lenses was seeking a buyer through a Morgan Stanley- and Jefferies-conducted sale process. Sources placed the Draper, Utah, company’s adjusted EBITDA at $150 million to $160 million, which implies an EBITDA multiple of around 20x. 

KKR, for its part, knows the vision industry well. The New York firm acquired National Vision from Berkshire Partners in February 2014, ultimately taking the optical retailer public about three-and-a-half-years later. This time around, KKR is investing out of its Core Investments strategy, which targets longer-term opportunities.

KKR managing director Felix Gernburd declined to comment on financials, but said 1-800 has been on KKR’s radar for several years, with interest heightening through its investment in National Vision.  

“The idea of putting the consumer at the front of everything and being a tech-enabled business caught our eye as the company became available,” Gernburd said. “It plays on two big themes that we have been thinking about and investing behind – the growing adoption of eCommerce and the growing adoption of telemedicine.” 

In fact, during the peak of the covid-19 shutdown, 1-800 experienced a 100 percent year-over-year increase in new and returning customers, all the while investing in more than 200 new hires in its Utah and North Carolina operations, KKR said in an announcement

Based on 1-800’s track record through not only the pandemic but through past economic cycles and under various different owners over the years, Gernburd noted the company has demonstrated its sustained growth model: “What COVID has done is broken down certain barriers and accelerated trends that are long-term in nature. We think that’s here to stay.”

These characteristics align with its longer-dated vehicle strategy, with 1-800 operating in a market which remains highly fragmented, the investor noted.

1-800 – operating at the intersection of consumer, technology and healthcare – has also been building out additional capabilities to create additional growth levers beyond contact lens. For example, the company in late 2019 bought vision technology startup 6over6, which, not yet approved, is set to be the first available technology to perform online eye exams. 

The innovative nature of the management team attracted KKR, Gernburd said. “[The team] is all governed by a simple and singular vision: making it easier for consumers in this space.”

Handsome returns

Exiting investors AEA and THL, both of which declined to comment, look poised to make out well on their investments. 

THL’s investment in 1-800 Contacts dates to February 2014, when it acquired the company from health insurance giant Anthem. Around two years later, AEA bought a majority stake in 1-800, and THL stayed on as a significant shareholder.

AEA’s January 2016 investment assigned the eyewear company an enterprise value upward of $1 billion, sources said at that time – implying that the company’s enterprise value has grown around threefold in under five years. 

Anthem’s sale of the e-commerce retailer came less than a couple years after it shelled out $900 million for 1-800 Contacts and Glasses.com. Anthem bought the eyewear businesses from New York PE firm Fenway Partners, which had taken 1-800 Contacts private in June 2007 for approximately $340 million.

Action Item: Check out KKR’s latest Form ADV