VMG Bites Into Robert’s Booty

VMG Equity, a San Francisco consumer products-focused PE firm, has purchased a controlling stake in Robert’s American Gourmet Foods, a healthy snack maker based in New York.

While I don’t know the multiple or price, this deal looks like a score for VMG. The target was highly sought after with a strong brand and revenue growth in the 30%-40% range*, with enough scale to handle mild leverage. Yet VMG managed to buy the company without so much as a formal auction.

In the branded consumer products space, you don’t grow to $50 million in revenue without capturing the attention of acquisitive parties. When I interviewed CEO Robert Ehrlich two years ago, he’d already been approached by so many suitors that he was asking them to write a two-page essay on why they were interested in the company.

He said then that he didn’t want to sell to a strategic like Frito Lay (owned by Pepsi) or Hain Celestial because the corporate higher ups didn’t give their acquisitions the kind of attention he sought to grow his company. Perfect opportunity for a small, brand-oriented consumer products private equity firm, I say.

He also said he’d accept offers in the $100 million to $200 million range, which would be approximately 2x-4x revenues, according to revenue figures on the company’s web site. That might fly in the beverage industry, but in today’s dealmaking and consumer spending environment, even for a growing company I’d say its wishful thinking. The firm wouldn’t disclose the deal valuation.

I’d guess a small premium was paid. The company’s products like Pirate’s Booty, Chaos, and Fruity Booty are strong brands that can’t be replicated. Ehrlich did that with a lot of failed experimentation. He told me the company has launched more than 350 products, including the time he bought the syrups of both Coke and Pepsi, mixed them together and tried to sell them as “Crepsi.”

One thing that may have hurt Ehrlich’s high hopes for an outsized premium is the bad press the company has garnered this year after a string of violations related to mis-labeling and food safety scares. Roberts American recalled some Veggie Booty products after they caused a salmonella outbreak. The company also mis-labeled products that contained wheat as “wheat-free” and miscalculated the fat content of other products, according to this Forbes article.  Judging by article’s characterization of Erlich’s reaction to these problems, perhaps company could benefit from stricter oversight and a better managed PR team to boot, before its strong brand loses the trust of its customers. Erlich seems to be more interested in the product development side of things—let the private equity firm apply its expertise to the important things like safety, balance sheets and logistics.

Michael Mauze, Managing Director at VMG Partners, told me his firm’s expertise in areas like packaging, distribution, manufacturing and other key components drew Ehrlich to the firm. Before even closing the deal, the firm began working with the company on new flavors and package redesigns, he said.

Erlich retains a minority stake and management position, but Mauze said the firm will bring in more management with Ehrlich’s approval. The deal used “a little bit of senior debt” and no mezzanine. Equity came from VMG Equity’s first fund, which is one third deployed. The firm closed that $325 million pool last year and has not yet made an exit.

*That growth figure was given to me by Ehrlich in late 2006, it could have declined or increased since then. Mauze would only say that the company’s growth was “in excess of the category’s growth, which is 15%.”