Why the huge Modibodi multiple made sense to Essity

But back to the Swedish forests, where in the late 1920s local magnate Ivar Kreuger created SCA, a forestry monopoly that still owns 6 percent of the entire Swedish landmass.

Little known outside his homeland, Kreuger was one of the most fascinating business figures of the 20th century. In a toned-down life, he owned hundreds of companies, including telecommunications companies Ericsson and the global monopoly Swedish Match, which controlled almost half of the world’s match market.

At one point, Kreuger was worth $170 billion in 2022 money, which would place him behind only Jeff Bezos today.

Unfortunately, this empire was a giant fraud that collapsed after the stock market crash of 1929. When he died three years later, officially by suicide, but perhaps by homicide, Kreuger’s own debts exceeded Sweden’s national debt.

Canadian economist and author John Kenneth Galbraith observed that “for those whose genius and imagination are not limited by integrity, [Kreuger was] the Leonardo of his trade.”

However, Krueger’s legacy lives on in the form of SCA’s forestry business and its 2017 personal hygiene spin-out called Essity. It is Essity that pursued and ultimately acquired Modibodi.

Essity’s Australian Interest

Essity is a $24 billion Swedish titan and no stranger to Australia, having last year acquired Assaleo, owner of major brands Libra, Purex and Sorbent, as well as Australian breakthrough TOM Organic.

The size disparity between predator and prey is striking, with Essity reporting revenue of $16 billion and more than $1 billion of net profit last year.

In contrast, Modibodi’s revenue was 300 times less than Essity’s, with sales of $57 million and profits of just under $6 million. Remarkably, Modibodi grew just 18 percent in the 2021 financial year, despite a pandemic-driven e-commerce boom.

Given the high potential of the leak-proof clothing market, Modibodi’s comparatively paltry size and non-explosive growth still attracted a large price from Essity.

One factor was undoubtedly Modibodi’s local and international customer base, numbering in the hundreds of thousands, and another may have been the company’s textile-related intellectual property.

Then there is the benefit of Modibodi’s majority shareholder, Quadrant Private Equity. Quadrant acquired a 60 percent stake in 2019 when it also acquired large stakes in other women-founded companies, including Adore Beauty.

Joe Aston’s lengthy musings on Adore make additional columns superfluous, suffice it to note that it was another masterpiece in Quadrant’s impressive oeuvre, demonstrating his ability to guide buyers beyond traditional metrics.

Modibodi is further proof that having Quadrant on your side can be a good valuation signal to sell founders.

slow growth

But the biggest driver of all was probably Essity’s own weaknesses. Last year, organic growth was just 3%, adjusted EBITDA was down 22%, and free cash flow was down 31% (the first half of 2022 was much better).

All in all, Essity is a great company that needs a boost and is in love with the exciting young Modibodi targeting a fast growing sector.

Although Modibodi itself won’t move Essity’s needle, it’s part of a larger group that includes a much larger Canadian company called Knix Wear Inc. Knix competes in the same leak-proof space, but with triple the financial revenue. from Modibodi in 2021 and generating $16 million in profit.

The real kicker is that Knix grew nearly five times faster than Modibodi, effectively doubling in size in a year. Essity paid even more for Knix, shelling out 38 times its 2021 financial gains but only acquiring 80 percent.

Knix founder Joanna Griffiths retained 20 percent and agreed to become president of the division. So, within a few months, slowly growing Essity suddenly has a leak-proof clothing division with $200 million in revenue and major blue-chip growth, led by a proven North American CEO.

Essity has positioned itself to dominate an industry it hopes to double in four years.

However, there is also room in these leak-proof deals for a few drops of pessimism because Essity itself is only trading at 12x 2021 adjusted financial EBITDA.

This likely means that the closing of these transactions was earnings dilution, very high debt, or both.

In the 1920s, Ivar Kreuger once cynically boasted that “I have built my company on the surest foundation that can be found: the stupidity of people.”

Those who now run Essity have paid handsomely to bet that leak-proof clothing will boost the company’s fortunes as a whole. But if they are wrong, they will become one more addition to the litany of deluded believers that is Kreuger’s true legacy.

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