Deal in Focus: Electra repaints Daler-Rowney's fortunes

The recent sale of fine art materials business Daler-Rowney to Milan-listed Fila Group in a deal worth £80m marks a successful turnaround of the company by Electra after it suffered a period of loss-making.

The case for Daler-Rowney was classic private equity: the company enjoyed an attractive market position, operated in a niche with high barriers to entry thanks to the discerning taste of artists and art students, bringing about a deep sense of loyalty to the products.

The growth plan was textbook: "There was an opportunity to consolidate the market and we had identified a number of smaller, single-product or single-geography companies with high product margins, which could be integrated into Daler-Rowney's supply chain," explains Alex Cooper-Evans, partner at Electra Partners.

Furthermore, the operational intervention needed to boost Daler-Rowney's margins provided a clear path for Electra to generate more value. "It is a very complex business because of its huge product range, with some products that it had to produce to ensure a full range but would sell very few of. And it had a complicated global supply chain," says Cooper-Evans. Because of this complexity, operational improvements made through simplifying the supply and manufacturing chains would result in neat wins for the company.

Strategically this was a great deal but it brought about complications because of the sheer number of products it produced" – Alex Cooper-Evans, Electra Parrtners

In late-2012 Daler-Rowney acquired German market leader Schoenfeld, owner of the Lukas and Nerchau brands. "We wanted to integrate the company's manufacturing into Daler-Rowney," recalls Cooper-Evans. "Strategically this was a great deal but it brought about complications because of the sheer number of products it produced."

Indeed, trying to move Shoenfeld's manufacturing into Daler-Rowney's caused disruption to the business, which led to a fall in revenues and incurred additional costs. By 2014, Daler-Rowney was suffering.

"This is when we decided to refocus the strategy," says Cooper-Evans, who goes on to outline the three major areas of focus.

Triple change
First, Electra changed and added to the management team. Chris Parratt was brought in as chair, as he had previously led the turnaround of former Arle portfolio company Ontex alongside Michael Teacher. The GP also implemented new CFO Clive Drysdale because of his background in helping businesses with operational challenges. Electra Partners also encouraged the company to boost the management team with further operational expertise.

The second step was bringing in a UK operations manager to develop Daler-Rowney's supply chain improvement programme; to indentify inefficiencies and solve them.

Finally, a cost reduction programme, which was headed up by Daler-Rowney's chief operating officer, was put in place to focus on procurement costs and to look at better integrating the supply chain.

"All of these strategies were critical to stabilising profits in the first half of 2015 and increasing profits in the second half of 2015," says Cooper-Evans.

Beyond bringing the company back to health, Electra also paved the way for Daler-Rowney's future growth. One example of this was investing in a manufacturing facility in the Dominican Republic for producing canvases, which Daler-Rowney supplies to customers including Walmart in the US. Previously the products were coming from the East Asia but, by moving manufacturing to the Dominican Republic, which as Cooper-Evans points out, benefits from free trade with the US and is a low-cost economy with a skilled workforce, cost savings were made. "This meant we boosted the margins and created capacity for more business. Meaning good growth for the future; making the business more attractive."

Indeed, the GP was approached by Fila, and by early-February the deal had been sealed thanks to the Italian group's ambitious growth plans and willingness to buy, which resulted in a good price and deliverability on the deal.

After being marked down as Electra's worst performing asset, turning the company around and generating a 1.6x return highlights the GP's flexibility and willingness to stick with its portfolio companies and roll up its sleeves when needed.

People
Electra Partners – Rhian Davies (senior adviser); Alex Cooper-Evans (partner); Zoe Clements (investment director).

Advisers
Vendor – Ashurst (legal).

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