Project 5 - Due Diligence (CDD) of Sports Nutrition Company (Protein Supplements)
Intro:
The target company owned multiple brands in the protein supplement industry.
This project was about conducting commercial due diligence for a Private Equity Firm aiming to acquire a growing company in the foods and sports nutrition industry. The scope, of course, included a detailed view into the market forecasts of each business unit, along with the local market dynamics, and capabilities analyses for the company in question. Moreover, the project was more heavily focused on the value-add creation strategy, requiring financial modeling on each value-add lever that we wanted to recommend for the short term exit plan. Given that the industry was fast moving, we also had to conduct multiple expert interviews in a short amount of time to verify the reputation of not only the company, but also whether its growth trajectory seemed promising enough, in the view of multiple industry experts. The PE already had a strong idea of how it wanted to run the company, so it was also a good experience in trying to align ours views with the ideas that the PE has also provided as well. We took the lead in conducting the base financials for the company, and of the Big 4 Accounting firms helped provided FDD services after our initial modeling was done.
Duration/Members/W&L Balance:
As with most DD projects, this was a short project, lasting for 3 weeks. Given the incredible amount of work we need to cover in this short period of time, that naturally means that work-life balance will suffer, and I for the first time really found myself working 120 hours in one week; this was a feat that I did not know was possible until I had joined consulting. We are only given 3 weeks, but basically have strict deadlines every 2-3 days, so we all had to make sure we received all the information on time from our RFI to the company, as well ensuring we got everything we needed to substantiate our storyline during the official BO sessions as well.
Nonetheless, I wouldn’t rate the project as too difficult despite the work-life balance, mostly because DD projects tend to be quite straightforward; it’s generally the sheer amount of work that is taxing, where the complexity of the work stays around the mid 5-6 level on a scale of 1-10.
We had 4+1 on the project (1 PM), 2 seniors and 2 juniors. Naturally the modules are split into the relevant business units of the target company, and I was lucky enough to lead the one surrounding sports nutrition. As an avid consumer of such products due to my hobbies, I had sufficient information and interest looking into the industry in question.
Thoughts on Industry:
The sports supplement industry tends to take on the form of any fast-paced consumer good. Marketing is probably one the most influential factors on success, and consumer preferences really change at unpredictable paces, so we needed to make sure whether the core capabilities of this company (also defining them as well) were at a strong level when compared to its peers.
The consumers seem to diverge into two main groups: the fitness fanatics, and the rest of the general population. Obviously, the dollar spend for each consumer of each group varied greatly, and the key buying factors each had different degrees of influences in determining an actual purchase.
For the sports fanatics, brand loyalty was quite important, but the main things they looked for was actual performance in their supplements. They tend to do their research on what actually works and what doesn’t, and although being price sensitive (looking for the best bang for their buck), they also purchase large volumes, making them a key customer base to retain once loyalty is cultivated.
For the gen pop., taste seemed to be the only ‘stable’ determining factor, as there were many people just trying out a supplement, such as protein powder, because they knew in their heads that it was going to be beneficial for their fitness goals, but did not have the sufficient need nor desire to look further into the details. In actuality, marketing fads seem to play the biggest role, as the industry always tends to look for ‘the next big thing’ that aids in weight loss or muscle gain. Therefore, these companies really try to select the right marketing campaigns, along with the right model to represent their brand, so that they can capture the attention of the curious public.
Profitability on the products tends to be high - as mentioned above, the actual raw materials, or the actual components going into your standard multivitamin or protein supplement are actually quite easy to source, and, across the board, will be similar more than 90% of the time across all the supplement companies you know. (No, one is not necessarily better than the other, as many sports trainers would lead you to believe) However, all that profit is generally redirected into your marketing fees, and it is not uncommon for a company to be investing 30% of its revenue (an incredible amount) into its marketing campaigns, just trying to gather as large a market share as possible to generate loyalty, and go on from there.
Interviewed experts from MyProtein, Optimum Nutrition, etc. for this project.
Project Details:
I like due diligence projects mostly because they are very straight forward in their approach. The PEF generally has a good idea about how they are planning to operate the target company upon acquisition, and there tends to be objective standards on determining the attractiveness of the particular deal. We need to assess the growth potential of the relevant market, which means, as consultants we need to properly identify the market segment, and determine the key levers and their expected trajectory for the near future.
Then, naturally we need to identify the market dynamics, including the external and internal factors that may affect the success of the target company, such as the barriers to entry or the competitiveness of other players in the market. The fun part of the DD comes when we work on the value-add strategies of the target company. This chapter requires a lot of brainstorming, and seems to embody the business cases that you learn at B-school or solve during case interviews.
Most DD’s require some form of financial modelling, mostly to set-up the base scenario of the target company’s revenue project, and trying to align an understanding of how the value-add levers can affect the expected top and bottom-line financials of the company. Just because of the time constraint, the levers to be used for the modeling and the extent of their effect needs to be aligned with the PEF at all times, as they tend to compare the valuation between the FDD and the CDD reports. This particular project, our analysis provided sufficient evidence that the price was overvalued, so the PEF was actually able to secure a discount on the basis that the future prospects of a particular business line was not as optimistic as the target company had made it seem.
Personal thoughts:
It was difficult on a physical level, as you need to survive on 3 hours of sleep a day, but you get to learn about speed on a DD. Also, luckily enough, the PEF was not as “asshole-y” as they usually are, so we were spared the mental difficulties and anxiety that follows a very unreasonable client.
It was definitely fun to interview brands and learn about an industry that I have much personal interest in. I had to interview senior executives at Myprotein, Optimum Nutrition (Glanbia), etc. to understand the market dynamics surrounding these health nutrition companies, and ended up with a lot of insight concerning the products I consume on a daily basis. Turns out, protein shakes are not at all difficult to procure, and these companies rely more heavily on marketing than I have previously thought.
More than the DD itself, I think that it’s also exciting to think about securing the next part of the deal with the PEF, in scoring a follow-up PMI (Post-Merger Integration) project. This would entail actually putting to action the plans that the PEF had to grow the company, starting with rebuilding the company structure and business model. Since we did a good job on the diligence, that means there is a high chance for the PMI to be awarded to us, provided that the fees match the interest of both firms involved.
Consulting Lingo:
Commercial Due Diligence/Post Merger Integration
Financial Modelling/Valuation
Value up strategy
Top/Bottom-Line Synergy