You’re reading Value Add’s weekly briefing, the leading newsletter for the operating side of private equity. Here’s what you need to know this week, from new insights for PE-backed executives and portco news to recent buyouts and investment trends.

Insights

Chart of the Week: In a recent case study, Value Add explored why operating as a private company was critical to the turnaround of Dell Technologies. “We can go faster on the transformation journey in a private setting,” said Dell’s former-CFO Tom Sweet. “We’re also making better investment decisions on a longer time horizon. We’re thinking about what’s the right three-to-five-year answer, versus how this affects us in the next 90 days relative to an earnings-per-share target.” Read the full case study.

More Insights

• Europe Private Equity Report 2024 (Read)
• Consumer Sector Private Equity Report (Read)
• Private Equity Case Study: BJ’s Wholesale (Read)
• Energy Sector Private Equity Report (Read)
• CEO Turnover is Highest in PE-backed Tech Buyouts (Read)

Spotlight

What’s the deal? PE firm KKR is acquiring Varsity Brands from Bain Capital for $4.8 billion. Bain acquired Varsity Brands in 2018 for $2.5 billion from PE firms Charlesbank Capital Partners and Partners Group, and was considering a sale or possible IPO of the company in 2023. Varsity employees are set to receive equity, a perk that is typically reserved for senior portco executives, as KKR is a sponsor of the Ownership Works movement. The company consists of two separate businesses: the first being BSN Sports, which distributes custom sporting equipment and apparel through partnered brands such as Nike and Underarmour. The other division is Varsity Spirit, which sells cheerleader apparel and uniforms, hosts camps and competitions, and produces school yearbooks. In 2023, Varsity made the decision to sell its Herff Jones graduation division to Atlas Holdings. Despite the sale, the company chose to retain the yearbook segment of the business. This strategic move underlines a continued and focused approach to continue investing in and developing its yearbook operations.

A closer look at Varsity Brands. It’s worth noting that Varsity experienced legal troubles over the years, which have likely put financial and operational strain on the company. Since Bain acquired Varsity in 2018, the company has faced many extreme controversies, such as allegations of operating as an illegal cartel and creating a culture of sexual-abuse and cover-up in the cheerleading industry. Let’s take a closer look: 

1. May 2020: Varsity faces a consolidated lawsuit over monopoly control in the cheerleading apparel industry.
2. September 2022: Varsity faces two lawsuits regarding sexual assault charges related to Varsity-Brands-connected coaches.
3. March 2023: Varsity settles a $43.5 million antitrust lawsuit with all-star cheerleading gyms. Another antitrust case, American Spirit and Cheer Essentials, was dismissed on procedural grounds
4. May 2024: Varsity and previous owners agreed to pay $82.5 million to settle a class-action lawsuit accusing them of monopolizing cheerleading competitions, camps, and apparel markets. Key elements of the settlement included:
   1. Removing requirements for cheerleaders to attend Varsity-run camps for championship eligibility
   2. Ending information sharing with the U.S. All Star Federation
   3. Discontinuing the practice of requiring participants to stay at Varsity-approved hotels

How does KKR fit in? PE firms are showing increased interest in sports apparel businesses — primarily due to consistent demand and steady cash flow. However, there are a number of factors that make Varsity in particular an attractive target. 

1. Control in a niche market: Varsity has a dominant market position in cheerleading and school merchandising through its various divisions. These divisions offer consistent and stable revenue with potential for growth.
2. Brand loyalty: Varsity has built customer loyalty in target markets across the United States such as schools, sports teams, and universities all of whom have used Varsity and its divisions for years.
3. Innovation potential: The core business has various opportunities for growth such as expanding product offering and/or digital presence, which would align nicely with KKR’s portfolio strategy.
4. Financial performance: Over the years, Varsity has demonstrated financial strength and resilience. The company raised $150 million in its latest funding round (June 2020), and was last valued at $2.5 billion in June 2018.

Despite legal challenges and reputational hurdles, Varsity’s strong market presence and potential make it an attractive target for a firm like KKR, aligning with its strategy of enhancing value in well established companies.

Buyout News 

Bain Capital and Cinven are planning a joint bid for the consumer health division of Sanofi SA, a French pharmaceutical company. Advent International and the Abu Dhabi Investment Authority are similarly planning a joint bid. While the dollar amount of both bids remains unknown, the division has an estimated value of $20 billion, according to reporting from Bloomberg. (Source)

KKR, CVC and PAI Partners have all bid between ​​€3.2 billion and €3.3 billion for B&B Hotels – slightly below owner Goldman Sachs’ ​​€3.5 billion asking price, according to the Times. GS bought the firm from one of the bidders, PAI Partners, in 2019 for ​​€1.9 billion, and has since grown B&B’s portfolio from 468 to 770 locations. (Source) 

L Catterton, French luxury fashion house LVMH’s PE firm, is working with UBS to sell its 20% stake in Bateel, a Saudi Arabian restaurant chain and gourmet food producer, which it acquired in 2015 for an undisclosed amount. The Al Sudairy family owns a majority stake in Badeel and is reportedly also looking to offload equity to potential new investors. (Source)

Permira has hired a new partner and co-head of climate, Anish Patel, joining from Kerogen Capital. Patel will share the role with Kush Patel, who joined Permira last year from Blackstone. Permira launched its climate investing team in March of this year, becoming yet another example of a PE firm beefing up its clean energy investment team – a theme which, according to our Energy Sector Private Equity Report for 2024, is becoming ever-more prevalent. (Source) 

Questions? Email us: editor@valueaddpe.com