Contact Sport

by Kelly Holman, The Deal

In March 2003, Premier Salons International Inc. CEO Brian Luborsky shared a meal with his friend Paul Cain, president of Dr. Babor GmbH & Co. KG's U.S. division. At the time, Luborsky had no hint of what lay ahead: a $100 million buyout of his company by private equity firm Falconhead Capital LLC.

Cain slipped Luborsky a phone number, suggesting that he get acquainted with Falconhead in New York. The firm owned Stonewater Spas, a luxury day spa chain based in New Haven, Conn. The phone number belonged to one of its operating partners, David Gubbay, who Cain had met two years earlier.

The rest, as they say, is history. A year later Falconhead acquired control of Premier Salons, a Toronto-based spa and hair salon chain, and merged it with the smaller Stonewater Spas in a deal valued at more than $100 million.

How it went about it is illustrative of Falconhead's style of generating deals by getting to know companies directly. It's an approach that Falconhead has favored since inception in 1998. The firm, which is partially backed by a $122 million investment from the California Public Employees' Retirement System, specializes in niche areas, primarily sports, leisure, lifestyle and media industries. Among portfolio companies are ESPN Classic Europe LLC and Maritime Telecommunications Network Inc.

David Moross, Falconhead Capital chairman and CEO, claims that each of the firm's 10 deals so far, invested out of its $215 million vintage 1998 fund, has been proprietary. The firm has nine investment professionals, including Moross, who he says have carefully crafted ties with deal sources, typically lawyers, bankers or business executives, or identified targets through trade shows.

"You don't have to go too far to get terrific dealflow," Moross says. "All of this is by word of mouth from people we know."

Toronto-based Premier Salons is a good example. Falconhead partner Gubbay became friendly with Babor Cosmetics America's Cain after a Falconhead associate, who was attending a high-end spa products trade show, met with Cain and introduced him to Gubbay.

Gubbay and Falconhead principal Zuher Ladak met Luborsky for breakfast in July 2003. Luborsky thought the buyout executives "were quite knowledgeable" about the spa business.

At the time, Premier Salons had 4,000 employees in more than 400 locations across the U.S. and Canada. Luborsky, a 20-year veteran of the spa industry, had done his share of buildups. Last year, Premier bought six salons named after luxury stylist Jos? Eber, who runs the Beverly Hills, Calif.-based Jos? Eber Atelier chain.

Gubbay and Luborsky clicked. "We thought highly of Luborsky, not only as an operator but also as a person that we could partner with," Gubbay says.

Falconhead formed Stonewater Spas in 2001 as a platform company, committing $38 million to support it. Stonewater subsequently acquired 20 spa businesses, including Kiva Spa in Chicago and Essentiels Spa of Boulder, Colo.

The buildup strategy was premised on the anticipated growth of the $10 billion luxury day spa business, coming from the growing number of aging baby boomers with disposable income and a rising interest in health and wellness. There were also at least 8,000 spas nationwide that were ripe for consolidation.

Moross' firm believed that while spas offer a multitude of services such as massages, facials, manicures and pedicures, the real growth opportunity is in the retail end of the business.

"You've got a captive audience coming into spas for a service, but from there you can transition them into buying retail products, and the retail margins are enormous," he explains.

In September 2003, Moross, along with Falconhead partner Hugh Evans, visited Luborsky in Toronto and made the initial overtures. Moross thought a merger made the most sense for both parties. By late October, Premier Salons and Falconhead signed a letter of intent to do just that.

Falconhead's 3-1/2-year association with Chevy Chase, Md.-based commercial lender CapitalSource Finance LLC also helped in securing a senior debt package to finance the deal in October 2003.

CapitalSource director Casey Zmijeski is one of Falconhead's regular financing sources. Zmijeski was previously at Heller Financial, where he got to know Evans, as well as principals Brian Crosby and Ladak. Ladak and Zmijeski, who joined CapitalSource in 2003, are also golfing buddies.

CapitalSource is an aggressive lender for companies with $5 million to $25 million of Ebitda, Moross says. It provided $18.3 million of senior debt to the Premier deal. Luborsky rolled over some equity and also provided $15 million in the form of seller financing.

The $100 million-plus transaction gave Falconhead a 61% stake in Premier, leaving 39% in the hands of Luborsky. For 2004 Premier is expected to generate $12 million of Ebitda on a pro forma basis, about triple the previous Ebitda on $40 million in revenue at the time of the merger with Stonewater.

Other connections contribute to Falconhead's pipeline. Besides Gubbay, Falconhead has relied on other operating partners, Charley Moore, James Solomon and Steve McNeely. Moore joined the firm in 2002 from talent agency IMG, where he was a vice president of its golf division. Solomon is the former president and CEO of Crunch Fitness International Inc. McNeely is former president and CEO of Cerberus Capital Management LP's real estate company, HQ Holdings.

Moross hints that one proprietary deal opportunity came up recently in Washington state through Moore, who has extensive connections in the golf and outdoors industry. Falconhead's $30 million acquisition of Miramar, Fla.-based Maritime Telecommunications Network in February 2003 came through Gubbay's network.

Holding the buyout firm's annual meeting every year to coincide with the U.S. Open golf tournament is also no accident. Just about everyone on the Falconhead Rolodex gets an invitation. As Moross says, "That event has been incredibly successful in bringing in new relationships." 

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