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Headquarters: Dallas, Texas
Executives: Chairman John Rochon Sr.
Products: Cosmetics, personal care, food and beverage, home décor, kitchenware, home care, wellness
|John Rochon Sr.|
|John Rochon Jr.|
Well-known business strategist John Rochon Sr. led innovative growth strategies as CEO and Chairman at Mary Kay Inc. and as a prime investor in Avon Products Inc. Now the Founder of Dallas-based private investment firm Richmont Holdings is returning to the direct selling world with a new model: CVSL Inc.
CVSL is a growing holding company of eight brands that sell into a global network. Its brands include: The Longaberger Company (baskets and home products), Your Inspiration at Home (spice blends and beverages), Project Home (home improvement products), Agel Enterprises (nutritional supplements and skin care), My Secret Kitchen (food products), Paperly (custom stationery) and Uppercase Living (decorative lettering). Kleeneze is the most recent acquisition, finalized in March. Kleeneze is a U.K.-based distributor of household, health and beauty products.
CVSL is expected to announce the planned acquisition of a ninth company by June 19.
Today 60 percent of sales among all CVSL companies come from outside the U.S. As a parent entity, CVSL acquires healthy firms and loss-making companies that Rochon believes can be turned around and made into profitmaking powerhouses. CVSL provides back-office, manufacturing and distribution support so that entrepreneurs can focus on developing and selling their products.
“We save companies that would otherwise not make it,” says Rochon, CVSL’s Chairman. “The combined portfolio helps even things out and makes it a more stable investment. And by eliminating redundancies we give shareholders a bigger return.”
Industry Overripe for Investment
CVSL’s executives see any direct-to-consumer company as a possible add to their $16.4 billion deal funnel. Rochon says the direct selling label is limiting and does not encompass all of the different approaches one can use to reach consumers. Direct-to-consumer sales refer to companies selling something outside of a traditional retail store and through a fully commissioned salesforce, whether the method is TV ads or direct mail used to get leads, or a virtual home party. Those sales also might be for services such as energy, which can generate continuous income.
Any firm using one of those methods is a potential acquisition for CVSL. Here’s why: Rochon sees a landscape filled with oversupply and undersupply. He says recent economic changes resulted in an oversupply of labor and capital and an undersupply of opportunities for people to earn supplemental income.
The direct selling industry makes earning extra income more efficient by using the Internet and demanding very little of a person’s time. You can sign up, sell to friends and relatives, and get paid for that. As a society, Rochon says we are short on good health, short on beauty and short on time.
|In October, CVSL will move its headquarters to the top floor of a new building in downtown Dallas.|
“As an industry, we sell the things that are in short supply in the world,” Rochon says.
To that end, the CVSL acquisitions team has identified about 60 companies across different geographies and product categories for its pipeline. Michael Rindos, Managing Director of Equity Research at New York-based Aegis Capital Corp., says the companies in CVSL’s deal funnel have the following breakdown:
- 34 percent are in the health and wellness category
- 24 percent are in the home category
- 14 percent are in the service category
- 14 percent are in beauty
- 8 percent are in accessories
- 3 percent are business-to-business firms
- 3 percent are in the food industry
“Given that the company’s current mix of portfolio companies favors housewares and the health and wellness category in the United States, we would expect CVSL to move into other categories and geographies—should a situation arise where the proper terms could be struck,” Rindos says.
What Aegis likes about CVSL is its ability to consolidate a highly fragmented direct-to-consumer market and its general philosophy of keeping much of the acquired company structure in place.
That includes retaining company founders and leaders should they wish to remain under the new structure. When executives do choose to leave, CVSL works to ensure the right people are in place so that business can continue without missing a beat.
Rochon says he is working hard to grow new leaders that can replace company founders when they exit. He says he is “hiring everyone he can and teaching them how we work,” because in the past 15 years no one has stocked the industry with people “who are ready to come in and take over, like they did when I was at Mary Kay’s knee.”
In 2015, CVSL has seen the departures of the co-founders of Paperly (January) and Project Home (April) and of Longberger Co. CEO Tami Longaberger (May).
At press time, Tami Longaberger and CVSL were embroiled in a legal dispute surrounding the circumstances of her departure, how she was replaced and management of the company at the time of her exit.
At Longaberger, CVSL Vice Chairman John Rochon Jr. was immediately appointed Chairman, President and CEO to replace Tami Longaberger. Rochon Jr. also leads Project Home. He travels to Newark often and leads monthly calls with the Longaberger field.
Rochon Jr.’s dual roles with the holding company and at Longaberger speak to a leadership style that is engaged with the salesforce. CVSL says Longaberger’s May results reveal a large swing upward. (CVSL does not report specific sales figures for its individual portfolio companies.)
Dallas-based CVSL plans to continue acquiring several companies each year. At press time, its portfolio included eight, described below:
The Longaberger Company
The Longaberger Co., based in Newark, Ohio, sells handcrafted baskets and home products, including pottery, cookware, wrought iron and home décor items. Founded in 1973, Longaberger operates in the U.S. and Canada. Its 16,000 consultants use a direct-to-consumer and party plan strategy. CVSL acquired a 51.7 percent controlling interest in March 2013, through a convertible note and an unsecured promissory note. The convertible note was exchanged for 1.6 million shares of CVSL common stock in June 2013. In total, CVSL paid $10.5 million for its 51.7 percent controlling interest, valuing the company at $20.3 million.
Your Inspiration at Home
Your Inspiration at Home sells handcrafted spice blends, oils, vinegars and beverages through a party plan model. Founded in 2011 in Gold Coast, Australia, the company joined CVSL in August 2013. CVSL purchased the assets of Your Inspiration at Home for $1.2 million. The company now operates a U.S. headquarters in Newark, Ohio, and its 6,000 consultants sell its products in Australia, New Zealand, the U.S., Canada and the United Kingdom.
Formerly Tomboy Tools Inc., Project Home sells and manufactures home improvement and personal safety products for women. The company uses a party plan model. The firm launched in 2000 and is headquartered in Denver. CVSL acquired Project Home’s assets in October 2013, valuing the company at $565,000.
Agel Enterprises is a direct seller of nutritional gels, nutritional supplement products and skincare products sold in more than 40 countries. Agel was founded in 2005 in Utah. With 23,000 consultants, the company uses a multi-level compensation structure. CVSL acquired Agel in October 2013 in exchange for 372,330 shares of CVSL common stock, a purchase money note for $1.7 million, and the assumption of certain liabilities. In total, CVSL paid $3.6 million for Agel.
My Secret Kitchen
My Secret Kitchen is a food and drink company that sells its products through home-based tasting events and online. Offerings include ready-to-use and easy-to-make food products, such as cheese balls, beer bread mixes, chili jams, and spiced sea salt, dressings, and sweets such as toffee hot chocolate. The company started in 2006 and sells in the United Kingdom. CVSL acquired a 90 percent controlling interest in December 2013 for $149,368 and will pay an earn-out of 5 percent of EBITDA from 2014 to 2016.
Paperly is a direct seller with consultants that work with customers to design and create custom stationery at home parties, events and individual appointments. Paperly was founded in 2006 and operates in the U.S., with a headquarters in Chicago. CVSL purchased the company in December 2013 for $75,000. It will also pay an earn-out of 10 percent of EBITDA for 2014 to 2016.
Uppercase Living manufactures decorative vinyl lettering products for display on walls in homes and businesses. It uses the party plan model, and customers can design their own word art. Founded in 2006, Uppercase Living is based in Salt Lake City and operates in the U.S. and Canada. CVSL bought the firm in March 2014 for $250,000. It also will pay an earn-out equal to 10 percent of EBITDA for 2014 to 2016.
Kleeneze is one of the U.K.’s largest direct-to-consumer businesses selling household, health and beauty products. Kleeneze’s 7,000 distributors serve customers in the U.K. and Ireland. CVSL purchased the business for $3.8 million in March 2015.
Formulas for Success
The senior Rochon is all about diversity. He wants CVSL portfolio companies to vary in their location, product and sales models, as well as in their appeal to people in different age groups and ethnic backgrounds.
By bringing in-house the common business operations and services for each of its portfolio companies, CVSL reaps several benefits. Human resources, IT, marketing, accounting and even manufacturing are centralized to drive efficiency and garner more control over operations and profits.
Rochon says the direct-to-consumer industry is one where it is best to control your own supply chain. “If your suppliers have control of what you are selling, they can squeeze you out of business,” he says.
CVSL invested millions to build a centralized distribution structure and a centralized manufacturing relationship with a sister company so that formulas for cosmetics and skincare products, as well as spice and gel production, are under CVSL’s development and control.
This strategy also delivers another edge, by letting the company “take a few percentage points out of it as well,” Rochon says.
Rochon and his executive team at CVSL employ a pretty simple equation for operating their direct sales businesses. Each portfolio company should be posting operating objectives that break down like this:
- 10 to 12 percent—program costs and discounts
- 26 to 28 percent—cost of goods sold
- 60 to 64 percent—gross profits
- 29 to 31 percent—commissions and incentives
- 15 to 17 percent—SG&A (the selling, general and administrative operating expenses) required to promote, sell and deliver products and services as well as manage a company overall
- 12 to 20 percent—cash operating EBITDA (earnings before the deduction of interest, taxes, depreciation and amortization expenses)
CVSL believes that if its businesses successfully follow this formula, it will lead to EBITDA margins of 13 percent to 17 percent.
When CVSL is researching potential acquisitions, it specifically looks for businesses that are missing the margins described above because they didn’t achieve scale or they hit scale and then lost momentum. When operational needs are centralized “loss-making companies can be transformed into positive free-flow generators,” Rochon says.
Your Inspiration at Home
Sometimes, CVSL is the perfect partner for a company that needs assistance to keep the growth going. At just 5 years old, Your Inspiration at Home is already an award-winning maker of hand-blended spices, oils, vinegars and beverages. It’s also the fastest-growing firm in the CVSL group.
When Colleen Walters launched her business, she anticipated selling at the five-year mark. “My thinking was it would get so big and we would not be able to handle it,” Walters says. “We knew we would need backup and support.”
Walters is no stranger to direct selling. Her career began in Canada, and she has spent more than 20 years working in the field, at the corporate level and as a consultant. When she started Your Inspiration at Home in Gold Coast, Australia (where she lives with her Aussie husband), Walters was very deliberate in her planning and strategy. Still, she was a bit surprised by her success.
In her first year in business, Walters saw $2 million (Australian dollars) in revenue. Sales grew so fast the second year that Your Inspiration at Home started to find it tough to keep up with the volume of orders coming in. After just two and a half years, she needed more support. Walters went looking for investors with a direct selling background and found Rochon. CVSL purchased the assets of Your Inspiration at Home for $1.2 million in August 2013.
“When we went to CVSL we had the brakes on,” Walters says. “We took the brakes off and got to $10 million. Now that we have all the systems in place, I can put my foot on the gas pedal. I can’t wait to see what happens.”
Joining CVSL gave Your Inspiration at Home an extensive back-office network, new manufacturing space in Sherman, Texas, and a U.S. home office in Newark, Ohio. Walters says she now has the strength that comes with strong analytics and the support to “manage our load in order to grow as fast as we are.”
The deal also meant Walters could focus on what she truly loves about the business—creating new spice blends and other products, traveling the world for inspiration and interacting with her field.
The year Walters joined CVSL, her company revenue jumped to $4 million, and in 2014 they hit the $10 million mark. Today, Your Inspiration at Home is growing even faster. The company is now active in the U.K., U.S. and Canada, and more than 4,000 consultants have signed up since January.
As CVSL’s stable of companies grows, so does the potential to generate profits. But this is a long-term play for Rochon, his investors and stockholders. Analysts who follow CVSL like the potential they see so far.
Brent Rystrom, an analyst at Feltl and Company Securities and Investment Banking in Minneapolis, initiated coverage of CVSL in March with a strong buy rating. Prior to the close of the Kleeneze sale, Rystrom predicted CVSL’s companies would generate between $100 million and $105 million in revenue in 2015. When Kleeneze is factored in, CVSL could see EBITDA between $11 million and $13 million in 2015 and EBITDA between $17 million and $20 million in 2016.
CVSL is an intriguing investment with lots of potential, Rystrom says. Management is financially adept. For example, CVSL has paid $12.5 million (cash, promissory notes, and shares) for the seven businesses it acquired in its first two years (not including Kleeneze). CVSL also assumed assets and liabilities. In that time, the sale of real estate owned by the Longaberger Co. in Newark, Ohio, generated $11.4 million in cash through a sale, which more than offsets all of the investment CVSL made in buying its first seven firms.
While assets of the Longaberger Co. helped to finance CVSL’s growth, it is not the largest company in the fold. Kleeneze holds that honor.
However, CVSL distribution and office facilities at Longaberger’s Ohio center also are used by Project Home and Your Inspiration at Home.
Aegis Capital Corp.’s Rindos predicts gross revenue of $158 million in 2015, up 45 percent from $109 million in 2014. A 3 percent growth rate and a full year of Kleeneze could deliver a 2016 top line of $176 million in 2016 and adjusted EBITDA of $23 million.
The Kleeneze deal showcases how CVSL spots a turnaround candidate and highlights the potential for big returns. Both Rystrom and Rindos note that adding Kleeneze to the CVSL portfolio may greatly boost revenue and EBITDA over time.
Kleeneze claims more than 7,000 sales representatives in the U.K. selling cleaning, kitchen, home, outdoor, health and beauty, and clothing products. For the fiscal year ended March 2014, Kleeneze had revenue of $60 million. CVSL bought the company for $3.8 million. So far, CVSL’s acquisitions see a modest decline to flat sales in the first two years after purchase as management focuses on cost of goods sold and SG&A. In 2016, if Kleeneze posts sales of $60 million and EBITDA of $6 million, CVSL will generate close to a 100 percent return on its investment of between $5 million and $7.5 million.
Money for Acquisitions
CVSL plans to acquire a new company every three months on average. Ownership of CVSL is consolidated among the Rochon family, and John Rochon controls 74 percent. While this leaves limited float to trade in the public market, Rindos says investors can take comfort knowing their interests are aligned with those of management.
A stock offering made by CVSL in March was designed to generate enough capital to manage the firm’s deal funnel. Rochon does not like where the stock is trading now—hovering around $2 a share. He says when compared to average performers, CVSL should be at $8 to $10 a share. But Rochon notes that CVSL is a complicated merger and acquisitions shop that simultaneously completes turnarounds, which he says can be difficult to value, because positive reported results can lag behind the actual progress being made toward generating positive free cash flow at the turnaround companies.
The CVSL stock was offered as a “share plus warrant” deal. This means that investors received a cash-exercise warrant along with each share of stock they purchased in the offering. A warrant is like a carrot used to get more investors on board. The warrant does not trade on an exchange, but it helps a company generate more investment capital in the event it is exercised during its five-year life. When investors exercise the cash warrant, it brings in additional funds for the company.
CVSL raised $20 million with its stock offering in March, and Rochon expects the entire deal to yield $45 million in cash in the end, assuming all of the warrants are eventually exercised at their $3.75 per share price. Given that there are 6.67 million warrants, that would provide proceeds of an additional $25 million to CVSL.
“We want the stock to recover, and we believe it will as we do more deals with modest income that we will turn around over time,” Rochon says. “Our investors now have an option on a firm that we believe should trade in the $30 to $40 range long-term if we execute on the plan.”
Building a Brain Trust
One of the big benefits of a holding company like CVSL is that the executives from each portfolio firm get to share best practices and interact with one another. There are quarterly meetings and more frequent phone conferences.
When Your Inspiration at Home joined the group, Walters attended a conference with her CVSL peers and has done so each year. One tip she learned about planning conventions from a sister company yielded big dividends for Your Inspiration at Home: By pre-selling convention tickets, Walters boosted her attendance from 180 to 500 in three hours. And now she is looking at attendance of close to 1,000 people for her next convention.
“That was huge for us,” Walters says. “The sharing is fabulous.”
|Project Home’s Tomboy Tools home improvement products|
The ability to access strategy across CVSL companies also is appealing to investors. CVSL has a vision to create what it calls the “consumer cloud.” This is a community of customers, sales agents and distributors from every CVSL company who can interact and engage with each other regarding opportunities to cross-market CVSL products. By using social media, email and other avenues, CVSL can build a huge customer community that could potentially leverage big discounts for rewards such as rental cars, office supplies and credit card offerings. Aegis Capital’s Rindos says, “The strategy of building a customer community may be a promising way to stimulate organic growth, as it may cultivate a ‘sticky’ customer base.”