Finance

Private Equity Loves Orphan Brands


Private equity players and corporate buyers are betting they can breathe new life into old brands. In recent months dealmakers have been scooping up once-mighty companies and business units. On July 16 private equity firm Golden Gate Capital Partners paid $286 million for defunct retailer Eddie Bauer.

With the credit crisis easing, deal activity for such orphan brands could accelerate. More companies are looking to prune their portfolios to raise cash or exit noncore assets amid a weak economy. And the bankruptcy courts are stocked with onetime powerhouse brands that have run into trouble. "The market is ripe," says Neil Cole CEO of Iconix Brand Group (ICON), which owns brands such as Candies, London Fog, and Rocawear and is looking to buy others. (The McGraw-Hill (MHP) Companies recently announced that it is "exploring strategic options" for BusinessWeek, including a possible sale of the operation.)

The buyers fall into two camps. First, there are strategic players, companies that want to expand into new areas or bulk up existing businesses. China's Sichuan Tengzhong Heavy Industrial just agreed to buy the Hummer line of SUVs from bankrupt General Motors (GM), while Penske Automotive Group, the nation's second-largest auto dealer, plans to pick up the bankrupt carmaker's Saturn brand.

In the other group are private equity firms and licensing companies scouting for distressed properties they can buy at fire-sale prices. Hilco Consumer Capital and Gordon Brothers Brands recently bought Linens N' Things in bankruptcy court for a paltry $1 million. The previous owners, a group led by private equity firm Apollo Management, paid $1.3 billion for the housewares retailer in 2006. "There are a lot of great brands out there," says Gordon Brothers principal Ken Frieze.

Relatively healthy brands can generate fast results for their new owners. In December, J.M. Smucker (SJM) bought coffee brand Folgers from Procter & Gamble (PG) in an all-stock deal valued at $3 billion. Smucker's management figured the recession would boost coffee sales: "The number of meals prepared and consumed at home ... continues to be trending upward in this challenging economic environment and is currently at levels not seen since 1994," Chairman Timothy P. Smucker said in the recent earnings announcement. In June, Smucker reported that profits for the fiscal year jumped 56%, to $266 million, largely on Folgers.

Of course, buyers can also get stuck with some duds. In 2006, Tower Laboratories, a Connecticut-based manufacturer, nabbed Bromo-Seltzer, the antacid that dates back to the 19th century. The new owners tried to market the product to twentysomethings, with a modern campaign that featured a tasteful "Bromo burp." But the fizzy remedy didn't sell. "There was a lot of clutter in the market, and the brand just never resonated with a younger audience," says Tower Vice-President Don Mesite. Tower decided to shelve Bromo earlier this year.

Strategy will be critical, especially with dormant or moribund brands. "You must be able to make [the brand] stand for all the things its old customers value and do some entirely new things" to create growth, says Robert Jones, a strategist at London brand consultancy Wolff Olins, whose clients include McDonald's (MCD), Tesco, and Apple Records. It's "a tall order, although it can be done."

One tactic is to turn an old brand into a private label. It worked with Nuprin, the over-the-counter pain reliever originally marketed under the slogan "Little. Yellow. Different." Pharmaceutical Bristol-Myers launched the brand of ibuprofen in 1984 and sold it to River West, a Chicago company that buys faded brands, in 2000. River West then sold the name to CVS (CVS) in 2004. The pharmacy chain is now the exclusive retailer of Nuprin.

Some buyers today are looking at licensing arrangements. Hilco Consumer and Gordon Brothers, which bought Sharper Image out of Chapter 11, is renting out the name to electronics and luggage manufacturers. Although the two private equity firms think retail stores don't make sense, they figure the brand name still has cachet in those categories. Iconix has made similar deals with Candies shoes and other brands in its portfolio.

Some brands are getting a complete makeover. Linens N' Things is now a Web-only operation, which keeps overhead costs low. The new owners figured the home goods retailer didn't have the heft to go head-to-head with industry giant Bed Bath & Beyond (BBBY) as a brick-and-mortar store. River West plans to reformulate Brim coffee with vitamins and nutrients. By revamping it dramatically, the firm hopes to reach a different group of consumers and ramp up sales. Says River West CEO Mark Thomann: "The world doesn't need another brand of coffee."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkBuying in BankruptcyCompanies in Chapter 11 are getting the attention of dealmakers. A Reuters (TRI) blog reports that bankruptcy-related mergers and acquisitions are at a five-year high. So far in 2009 there have been 173 such deals, including Financière Elitech's acquisition of Nanogen for $25.7 million.To read the full blog item, go to http://bx.businessweek.com/mergers-and-acquisitions/
Carbonara is a senior writer for BusinessWeek.

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