Patience and perseverance helped Centre Lane Partners see potential in Capital Brands when many others did not. “I think the lesson is never to judge a book by its cover,” says managing director Mayank Singh. “To find these sorts of opportunities, you really need to dig in.”
Capital Brands required a lot of digging. Founded in 2003, the company first sold its products via infomercials. It effectively created the product category of the single-serving blender, and had two major products, the NutriBullet and the Magic Bullet.
Capital Brands first came on to Centre Lane’s radar in 2012, when the company was thinking of marketing its products to retailers. The two parties talked about a possible deal but were unable to come to an agreement. Yet the firm kept watching.
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Project in need of salvage
By 2018, the company was a mess. From 2014 to 2017, net revenue fell by 50 percent and adjusted EBITDA by 80 percent. It was in forbearance of its debt and had just come off of a failed sale. After profiting from a massive dividend recapitalization in 2015, the two owners were no longer on speaking terms.
Singh said it was the kind of deal many investors would pass on. But there were signs the company was not only salvageable but had future growth potential. For one, brand loyalty and awareness were extremely high.
“The customer calls were some of the best customer calls that I’ve had covering the consumer space in terms of just what this brand meant to the retailer,” Singh says. “The retailers all said if you could launch new products and take the brand into other categories, we would immediately give you shelf space.
“Despite everything, they were dying for innovation.”
“They were underpinned by the brand awareness and frankly the incredibly strong community of people who use the product,” says Centre Lane co-founder and managing director Quinn Morgan.
Centre Lane also identified operational improvements that could significantly reduce costs. The expenses on infomercials could be cut down and replaced with other forms of advertising. The company had also depended on the same overseas supplier for its entire existence. Centre Lane made considerable adjustments in these areas, considerably cutting costs.
‘Listen to the consumer’
Innovation played a major role, too. At the time of the acquisition, Capital Brands was essentially a two-product company, both of which were single-serving blenders. Centre Lane remembered what retailers had said and created a new product development team.
“We really focused the company around ‘Let’s listen to the consumer,’” Morgan says. “Where can we be helpful to the consumer?”
In focus groups, the team found that customers wanted to be able to make larger portions, so they created a combo blender. They also learned that customers sometimes wanted juice more than they wanted a smoothie, so they created an easy-to-operate and easy-to-clean juicer. Both drove significant growth. The company has other products in the pipeline as well.
“Capital Brands clearly was not performing to its full potential,” Morgan says. “It was not optimizing its marketing, it didn’t have the right management team, it didn’t have the right supply chain, and it didn’t have the right cost structure.”
Centre Lane bought the company for $95.8 million and sold it to De’Longhi in December for $420 million.
At acquisition, Capital Brands had $193.9 million in revenue and $19.9 million in EBITDA. At exit, those had increased to $290 million and $70 million, respectively.
Moreover, the deal had a gross internal rate of return of 127.5 percent and a 6.6x multiple on invested capital.
This bears out the importance of looking beneath a company’s surface to see not only the factors working against it, but those working for it.
“Once you unleash some of these positive forces, you can quickly get a company back to growing,” Morgan says.
The winning numbers
Gross internal rate of return
Multiple on invested capital
Sale price to De’Longhi
EBITDA by end of 2020