February 20, 2005 by Jonathan Lansner Orange County Register "Who'll buy it from us?" Not the first question most investors ponder when they're shopping for new assets. It may seem backward logic, but TSG Consumer Partners focuses heavily on how to sell an investment even while deciding whether to buy it. And who'd want to question investors who say they've averaged 60 percent a year returns over the past 18 years? "We spend a lot of time talking to the large companies, (asking) what they're interesting in buying," says Chuck Esserman, co-founder of the San Francisco investment firm that owned stakes in four Orange County-run brands in recent years. "We don't want to buy a company that we don't think we can sell." The latest cash-out by TSG was the sale of Irvine-based Mauna Loa Macadamia Nut Co. in December. Candy giant Hershey Foods paid $125 million - five times what TSG paid in 2000. It's another win for TSG, a so-called "private equity" investor managing $700 million primarily in small consumer brands. Private-equity investors raise money from big-dollar investors and use that cash to buy controlling stakes in privately held companies. TSG's passion has been "emerging lifestyle brands" - newfangled food and personal care products. For example, it made a 125 percent profit in a year by buying and selling Met-Rx, the sports nutrition specialists from Irvine. Met-Rx was bought in 2000 by Rexall Sundown, a top vitamin seller, for $108 million. That windfall wasn't just good timing, Esserman says. In the year of ownership, TSG helped Met-Rx double sales by pushing the products, taking them from gyms and health clubs into national retail chains. Met-Rx is an example of how TSG works to latch on to fresh consumer niches - not simply businesses that are into the latest fad. "If something is trendy," Esserman says, "we wouldn't want it." BUYING POWER TSG is by no means a bottom feeder that profits by recycling tired brands. Esserman says he almost wishes he could consistently play that game. But, "We unfortunately haven't been that lucky to find high-quality brands at a cheap price." TSG's ideal target is the operator of a small, growing brand with attractive profit margins who's seeking a financial partner. TSG offers these sellers a shot at trading part of their businesses for cash, for dollars to expand the operation, or both. Typically, the acquired company's management retains a piece of the business, often as a performance incentive. Take deals with Don Miguel, the Mexican-food maker from Anaheim, and Meguiar's, car-wax specialists from Irvine. TSG, which still controls both firms, helped key members of both organizations get money out of their companies. Numerous private-equity investors like to buy what are called "orphan brands" - old concepts being discarded by big corporations. In many cases, getting a brand out from under a massive bureaucracy - and adding a little cash and tender loving care - can do wonders for both the business and the investors. TSG typically shuns these deals, but that's how it started Medtech: buying brands from what was then American Home Products (now Wyeth) in 1996. Last year, TSG decided it was time to sell Medtech's portfolio, which includes Compound W wart remover, Denorex dandruff shampoo and Cutex nail polish remover. Since the desired buyers - large industry operators - only wanted to cherry-pick among the Medtech brands, TSG held an auction for the entire portfolio. Other private-equity investors bid up the price to a point where TSG made eight times its original investment. A SWEET DEAL In the perfect world, TSG would only sell to the big operators - so-called "strategic buyers" - who are looking to expand their portfolio of brands. These big companies are willing to pay top dollar - but only for well-run businesses that easily fit into their lineup. TSG wasn't thinking that Mauna Loa was ready to sell until Hershey signaled it might want to buy the brand. "In my business, when somebody approaches you - you listen," Esserman says. Hershey did its homework on Mauna Loa's key financials, which included a doubling of sales under TSG's watch. Esserman figures a global candy maker like Hershey can do even more with the quirky Hawaiian nuts. If Hershey can sell chocolate bars with almonds or peanuts, why not macadamias? "They're the experts," Esserman says. TSG isn't just shedding brands. It recently acquired stakes in high-end bottled water, a trans fat-cutting technology and a personal-care products maker. All the while trying to figure out who'll eventually buy the brands that it just bought. Copyright © 2005 Orange County Register Copyright © 2008 TSG Consumer Partners. All Rights Reserved.