Direct marketing is hot-and 'Net is at tip of flame
By Kelly Holman for Auction Block
When Falconhead Capital LLC acquired Growing Family Inc. from Sentinel Capital Partners and Nautic Partners LLC this month for undisclosed terms, the New York private equity firm was keen on tapping an avenue of growth for the St. Louis-based company in addition to the baby photography business.
Growing Family — "the company that takes your baby's official photo in the hospital," its Web site says — already runs a telemarketing operation as well as focusing on its picture taking. But Falconhead also sees another opportunity: the chance to use the company's Web site, which receives more than 32 million page views a month, as a springboard to market infant-related consumer products directly to its customers.
As David Moross, chairman and chief executive of Falconhead, likes to point out: "The real opportunity should be developing marketing relationships on the Web site."
He's not alone. Direct marketing is hot, and direct marketing via the Web is at the tip of the flame.
A term coined by marketing executive Lester Wunderman in the 1970s, "direct marketing" refers to bypassing brick and mortar retail stores to market wares directly to consumers. Traditionally it has depended heavily on catalogs and other direct mailings, although direct marketers sell goods across a variety of channels, including television and the radio. And companies that focus on such activities are still attractive to financial buyers.
But the Internet is viewed by many as a key vehicle for reaching today's consumers, with their information overloads and short attention spans. In fact, more than 50% of small businesses believe they can use the Internet for sales, marketing and customer support to help grow their business, according to technology analysis firm research by Access Markets International Partners Inc.
Companies that specialize in direct marketing — like Lillian Vernon Corp., a catalog and online retailer of household items bought by Sun Capital Partners Inc. in June — have been acquired by a number of high-profile midmarket and top-tier financial buyers through auctions during the past year.
Carlyle Group, Linsalata Capital Partners, Spire Capital Partners and Milestone Partners also invested in the direct marketing sector over the past year.
Meanwhile, other financial buyers — such as Audax Group, Brentwood Associates, Spectrum Equity Investors and TA Associates — harvested their holdings in the industry.
Growing Family appealed to Falconhead. The buyout shop, which had previously invested in catalog and online seller Golf Warehouse, had been looking to invest in another direct marketing-related business for some time before being contacted by Minneapolis investment bank Goldsmith Agio Helms about Growing Family earlier this year.
A firm known for investing in leisure and lifestyle-related companies, Falconhead came on the scene at the latter stage of Growing Family's auction. The sale had targeted a host of strategic as well as financial buyers, particularly those with an interest in direct marketing and media.
Falconhead submitted an offer and walked away with the company and the potential it offers, especially on the Net.
Internet-based direct marketing cuts across industrial sectors. Take Eckler Industries Inc., a Titusville, Fla.-based company that offers after-market car parts to consumers interested in restoring vintage automobiles.
Eckler runs multiple Web sites that cater to people interested in popular American autos such as Corvettes (it sells 21,000 Corvette-specific items), as well as a multitude of products for classic Chevy pickup trucks, Camaros and other cars.
The company hired San Mateo, Calif.-based Coremetrics, a Web analytics and precision marketing firm, to manage its search engine marketing program. Coremetrics' mission was to identify the Eckler products that were most in demand on its Web sites, as well as the relevant keywords for product searches.
Eckler used the information to hone its Web site offerings. The results, according to Eckler and Coremetrics, were impressive: a 602% increase in online order volumes and a 541% increase in sales revenue.
Goldsmith Agio Helms brokered the sale of Eckler on behalf of St. Louis investment firm Harbour Group to Los Angeles private equity firm Century Park Capital Partners in July, in a deal valued at more than $37 million.
The investment banker received 30 indications of interest from prospective buyers before the process zeroed in on Century Park following a meeting with Eckler's management team earlier this year, says David Solomon, a managing director at Goldsmith Agio.
As Century Park managing partner Martin Jelenko saw it, Eckler offered not only a chance to tap into a profitable business run by seasoned executives, but also an opportunity to reach a wildly enthusiastic audience, Solomon recalls.
"Marty Jelenko called me up after the management meeting and said, 'I want to buy this business.' He said, 'It's all about Americana; the car speaks to the American soul,'!" the banker says.
That month, St. Davids, Pa.-based Milestone Partners purchased a majority stake for an undisclosed sum in Bodybuilding.com, an online retailer of muscle-building powders, pills and other supplements. The sellers were founder and chief executive Ryan DeLuca and other family shareholders.
But the direct marketing action isn't all on the Internet. Companies that use more traditional ways of reaching customers also have appeal.
Like Century Park and Milestone Partners, Spire Capital Partners LP found an opportunity to tap into a niche audience, albeit yet another sort. Its target was Phoenix's SkyMall Inc.
Last December, Spire teamed with New York's ZelnickMedia Corp., at the time an investor in Lillian Vernon, to acquire SkyMall for $52 million from Gemstar-TV Guide International Inc.
The deal gave the two firms control over a company that distributes its catalog on the jets of almost every major airline in the nation. The eyeballs of travelers throughout the nation often scan its catalog pages, which are chock full of gadgets that range from margarita-making machines to digital watches, stereos and other recreational items.
"We have a captive audience that sits on airplanes for more than an hour at a time. The audience is a pretty highly coveted demographic with above-average household income," says Sean White, a partner at Spire Capital Partners.
The company also sells its products on its SkyMall.com Web site.
For Falconhead, Century Park, Spire Capital and like-minded financial buyers, the basic appeal of direct marketing businesses is compelling: They generally offer steady cash flow, low overhead and an established and often well-defined customer base, as well as predictability of earnings.
A highly fragmented industry with 10,000 to 15,000 catalog titles, direct marketing also offers plenty of acquisition opportunities.
In addition, the financial outlook for the sector during the next six years is positive. Sales from direct marketing are forecast to grow by 6.4% through 2009, a 5.3% increase over the period between 1999 and 2004, according to New York's Direct Marketing Association.
And from a private equity standpoint, direct marketing companies can often be sold for lofty purchase multiples. That, of course, means highly profitable exit opportunities for financial buyers and their institutional backers.
When Los Angeles private equity firm Brentwood Associates sold Omaha-based Oriental Trading Co., a direct marketer of party supply and home décor products, to Carlyle Group for $1 billion in June, the purchase multiple amounted to about 11 times Ebitda, says an investment banking source.
Similarly, South St. Paul, Minn.-based Sportsman's Guide Inc., a seller of hunting and hiking products, commanded an 11-times Ebitda multiple when French retailer PPR SA agreed to buy the company for $265 million in May, an investment banking source says.
Given such lofty payouts, it's no surprise that financial buyers are hungrily eyeing direct marketing businesses.