Making An Acquisition In A Recession

Last Wednesday 22nd April my company Severn Delta acquired the business of PitRok Ltd. and in particular ownership of the PitRok brand of natural deodorants. Given that at a glance this has looked like something of leap for Severn Delta, not to mention that we have made the acquisition in the teeth of a recession, I thought a few words on the subject were in order.

1. How does this make sense for Severn Delta?

The logic is three fold:

a) The distribution fit is good. Both Severn Delta and PitRok sell fast moving consumer goods into UK multiple retail. The overlap is strong with three exceptions - one where we are stronger by a long way and two where PitRok is stronger. The net effect is the opportunity to broaden the distribution base in both directions.

b). We have acquired the PitRok brand and this will increase the % concentration of branded business vs contract manufacturing.

c) Price and ease of absorption are attractive. We have bought at a reasonable price a small business with strong cash flow and a low level of complexity that makes it straight forward for us to take over and absorb administratively into Severn Delta.

That caveat is of course that any acquisition features some of Mr Rumsfeld's "unknown unknowns" or as Sig put it me that in any acquisition you are:

" walking out into the dark night and there is no flashlight strong enough".

So we will see how we get on!

2. Don't you know there is a recession on?

Yes. But this is a factor in favour of the acquisition rather than against. Firstly because this makes the price perhaps more favorable than at other times (although we have paid a fair valuation of the business) and secondly because even though the bank margin may be higher than in previous years it is some of the cheapest money we have ever borrowed and our total borrowings are still low compared with our early history!

A third point is that it strengthens the business as a whole. It gives us greater market breadth, additional cash flow, distribution reach and a new brand in the stable with range extension possibilities that lie within our competency reach.

3. But aren't you a textile company?

Yes and no. We manufacture textile consumer goods but many of these are in the form of moistened wipes with personal care formulations, so we already have a number of skin care products in the portfolio that are not so far from a deodorant.

We work under the regulation of the European Cosmetics Directive already, and our preference for natural and organic components rather than petrochemical alternatives is again a good fit. Our new "ABSOLUTION" by Sarah Smith is an example.

More importantly we have grown our Sarah Smith brand from zero to a level where it is twice the size of the PitRok brand, doubling sales twice since launch in late 2005. We will aim to apply the same methodology to PitRok to ensure its longevity as a strong, if niche brand and hopefully delivery some growth into the bargain.