By Dhruv Kotecha, Keerthi Komati, Ryan Luk and Aviral Jain (University of Nottingham) ; Varun Vinay Iyengar, Rui Lee and Ardia Daniswara, Kai Lim and Katerina Georgiou (King's College London)
Photo: Arpad Czapp (Unsplash)
Overview of the deal
Acquirer: Yellow Wood Partners
Target: ChapStick
Total Transaction Size: $512m
Closed date: First half of 2024
Target advisor: Allen & Overy (legal)
Acquirer advisor: internal Haleon team (legal)
On 25th January 2024, Yellow Wood Partners, a Boston-based private equity firm, announced that its portfolio company Sauve Brands Company has signed a binding offer to acquire the ChapStick brand from Haleon, a global leader in consumer health. The financials of the deal comprises of a cash payment of $430m as well as a stake in the acquiring company, valued at around $80m. The transaction is intended to close in the first half of 2024 upon completion of customary closing and regulatory approvals.
The iconic lip balm company, ChapStick, has the highest brand awareness in lip care and is the number one brand by volume in the lip care industry. Despite this, the brand was not a core focus for Haleon anymore. Chapstick will be Yellow Wood’s fifth corporate carve out transaction in the past four years. The brand should now benefit from Sauve Brand Company’s leadership, with the future promising continued innovation and accelerated growth for both ChapStick and Yellow Wood’s diverse portfolio of consumer brands.
“While ChapStick was a great brand much loved by consumers around the world, it was not a core focus for the company. Selling the brand allows us to simplify our business and pay down debt more quickly." - Brian McNamara, CEO of ChapStick
Company Details (Acquirer - Yellow Wood Partners)
Yellow Wood Partners is a Boston based Private Equity firm whose primary focus lies with consumer brands and companies. It boasts a portfolio of 35 brands with $1.8B of assets under management. The firm, established in 2011, continues to exercise its consumer industry knowledge and experience through its well-versed and seasoned partners, management teams and operational experts. Yellow Wood pioneers their “Consumer Operating DNA” strategy to private equity investing, allowing them to combine their deep and extensive industry research and knowledge to find the perfect partners for their investments. Through data-driven analytics and their highly involved operational initiatives, Yellow Wood invests exclusively in consumer brands and has established itself as a seasoned player acquiring brands such as Dr.Scholl’s and Isle of Paradise.
Founded in 2011, headquartered in Boston, Massachusetts, United States
CEO/Managing Director: Dana Schmaltz
Number of employees: 25
Market Cap: N/A
EV: N/A
LTM 02/2024 Revenue: N/A
LTM EBITDA: $15-100mn
LTM EV/Revenue: N/A
LTM EV/EBITDA: N/A
Recent Transactions: Elida Beauty from Unilever (2023), Suave from Unilever (2023), PlusOne (2022), Scholl (2021), Dr.Scholl’s from Bayer (2019)
Company Details (Target - ChapStick)
ChapStick is a brand of lip balm, created in the early 1880s by Charles Browned Fleet, a physician and pharmacological from Lynchburg, Virginia. The primary purpose of the product is to treat and prevent chapped lips, with varieties such as sunscreen to prevent sunburn. The brand has undergone multiple ownership changes, previously owned by companies like Wyeth and Pfizer. The term “ChapStick” has now become a yardstick and genericized trademark for lip balms.
Founded in 1869, headquartered in North Carolina, United States
CEO: Brian McNamara
Number of employees: 28
Market Cap: N/A
EV: N/A
LTM Revenue: $142 million
LTM EBITDA: N/A
LTM EV/Revenue: 3.59x
LTM EV/EBITDA: N/A
Projections and Assumptions
Short-term consequences
As Haleon is to sell the well known lip balm brand ChapStick to the private equity firm Yellow Wood Partners for about $510 million ($430 million in cash and a stake valued at around $80 million), we must consider the short term consequences. The cash infusion of $430 million can improve Haleon's liquidity position and provide the company with immediate financial flexibility. The CEO of Haleon has said “Selling the brand allows us to simplify our business and pay down debt more quickly”, so it can be seen that decreasing debt will be a short term consequence, and hence we can expect a better debt to equity ratio for Haleon. Through selling the brand there is an opportunity cost of a loss of potential future income or capital appreciation, but we must consider that there will be a higher financial flexibility to pursue growth opportunities too which is a positive.
However, Haleon will likely face asset restructuring costs, which can potentially have an impact on short term profitability. They may need to terminate contracts or agreements associated with the divested assets, such as lease agreements, supply contracts, or service agreements, which will increase Haleon’s expenses.
Additionally Haleon will need to engage financial advisors, legal experts, and other professionals to facilitate the sale of ChapStick to Yellow Wood. These transaction costs can include advisory fees, legal fees, and other related expenses, and will incur short term costs for Haleon. However, even though in the short term there is a negative impact on profitability, and expenses, the long term holds potential for reduced debt for Haleon, and eventually improve its debt-to-equity ratio, strengthening its financial position.
Long-term Upsides
Yellow Wood's acquisition of ChapStick unlocks a dynamic potential for cost-saving synergies and market expansion. Streamlining operations and consolidating procurement, leveraging Yellow Wood's expertise, will generate efficiencies that directly translate into resources for strategic investments. These investments encompass data-driven sales strategies, targeted marketing campaigns, and improved inventory management, ultimately strengthening brand control and enhancing customer experience.
Furthermore, the projected 7.72% CAGR in the global lip balm market by 2030, as per Zion Market Research, presents a fertile ground for growth. ChapStick's established brand and consumer loyalty position Suave Brands to capitalise on this trend through targeted innovation. This includes developing natural, organic, and sustainable offerings alongside personalised solutions like sun protection, catering to evolving consumer preferences and expanding market reach.
Moreover, Yellow Wood's marketing expertise presents a potent tool for expanding ChapStick's reach and driving revenue growth. By optimising digital channels, forging strategic partnerships, and executing data-driven campaigns, Suave Brands can unlock additional revenue streams and engage new demographics, solidifying its market leadership. Additionally, part of the planned acquisition involves Haleon obtaining a passive minority stake in Suave Brands Company. This fosters long-term alignment, opening doors for collaborative efforts and knowledge sharing in areas like market insights, product development, and distribution, further propelling Suave Brands' growth trajectory. This dynamic acquisition, with its focus on operational synergies, market growth potential, and strategic collaboration, paints a promising picture for the future of ChapStick and Suave Brands.
Risks and Uncertainties
Despite the potential M&A synergies and other upsides both in the short-run and the long-term, any deals must bear risks and other uncertainties. For example, from a macroeconomic perspective, the market size of the beauty and personal care industry in the North American region is $119bn in 2023, with a CAGR at 3.95%, estimating its potential size in 2029 at approximately $151bn. However, within the beauty & personal care market, the lip care sector merely holds around 0.37% of market share at about $452mn of market size in 2022, coupled with a slower growth rate at 1.7% until 2028 at around $500mn. This recent acquisition has the potential to cause uncertainty in balancing the cost & benefit analysis of the deal due to the small amount of market share it holds, with a revenue of approximately $143mn in 2023.
Moreover, 2022 and 2023 have been very tough years, in particular the Ukraine and Middle-Eastern conflicts, coupled with global inflation at around 9% in 2022 followed with high interest rates to hedge the rising inflationary pressures. The beauty and personal care market have been highly impacted, especially within their supply chain. Despite the aftermath of the recovering period from the Covid-19 pandemic, the beauty and personal care market has seen increased business costs, particularly raw material prices, production and distribution costs – urging beauty retailers to learn from these past events and to be more cautious to make better informed business decisions.