Deal in focus: Change Capital Partners buys Frette

After a 10-year holding period, an offer from Change Capital Partners was enough to convince San Francisco-based JH Partners to part ways with some of its stake in Frette, an Italian luxury linen producer.

The deal saw JH retain a minority stake in the business, with majority ownership taken over by the incoming consumer- and retail-focused investor. Steve Petrow, partner at Change, explains the vendor's decision to remain a stakeholder: "[JH] believes we are going to improve the company and return it to profitability; they preferred to keep a small piece in what will be a much bigger pie once we grow the business, rather than sell now."

"We contacted JH directly," says Petrow. "We like to find brands like Frette that have great international brands and recognition, but where the underlying financial performance isn't what it should be. So we reached out to them about a year ago, with ideas we had for the brand having visited their stores."

Advised by AdviCorp, JH completed the buyout of Frette in 2004 via the holding company Coraline, according to unquote" data. Frette was previously owned by parent company Fin.Part Group, which was declared bankrupt in 2005, though its history dates back to 1860. Based in Monza, near Milan, the company creates luxury handcrafted linens and textiles for sale to hotels, restaurants, private homes, airlines, ocean liners and trains, including the Orient Express. Aristocratic families across Europe and the Vatican are also counted among its customer base.

Budding brand
"As a speciality house, we do a lot of consumer research," says Petrow. "Before we got really excited about the business, we did research in China, America and Europe and the brand is incredibly well-known and well-regarded among high-net-worth individuals in all three markets. It's a very well-loved brand, but it's only turning over around €90m. It should be much bigger with global awareness like that, so our number one thesis is to grow the brand to reach its potential."

Frette currently has 15 stores around the world in Paris, Milan, Rome, New York and Beverly Hills. Its products also retail in high-end department stores in Los Angeles, Hong Kong, London and Moscow. Change's growth plans include the opening of new stores across the globe and the expansion of the firm's wholesale network, with a focus on increased presence in department stores and speciality shops.

"We'll also focus on the hospitality business, which provides sheets and accessories to five star hotels around the world," says Petrow. "That's about a third of the business today and it's a great way to get new customers. You can imagine these high-net-worth individuals stay at a suite at Claridge's and love the sheets and there's a shop next door... it really works."

Structured as an all-equity transaction, the investment is the sixth completed via Change's second fund, a 2008 vintage vehicle that holds around €200m with enough dry powder for one more deal; the GP is expected to raise its next vehicle at the end of this year or in early 2015.

Change typically invests in businesses with an enterprise value of €20-50m, committing an average equity ticket of the same value. "It was an all-equity deal. It gives us a lot of flexibility in terms of using all the capital to grow the network, build stores and develop products without thinking about servicing debt," says Petrow. And Frette is not the only Italian brand in its portfolio, which includes Vesovo, the owner of casual dining chain Rossopomodoro.

"Our view is that the Italian economy has bottomed out – it has been difficult," says Petrow. "We're invested in the largest pizza chain in Italy, which is a great barometer of sentiment. It's been a tough couple of years but the signs are clear now that it's improving. The important thing is that Rossopomodoro and Frette are outward-looking export businesses, so while they have a portion of their businesses in Italy, they aren't reliant upon Italy alone."

People
Steve Petrow is a partner at Change. Steve Baus is a partner at JH.

Advisers
Equity – KPMG (Financial due diligence); Kirkland & Ellis (Legal); LMS (Legal); Ardent (Legal).

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