Anatomy of Recent Deals: Brazil

Our firm was engaged by a Fortune 500 cosmetics & toiletries manufacturer to identify and assess a potential JV/acquisition target in Brazil. With CF&T sales of $12.5 billion in 2006 and a growth rate for 2007 that is expected to exceed 19% Brazil is a global leader in the growth of cosmetics sales. In addition Brazil is becoming a leader in the export of cosmetics with a growth rate of 20% in 2005 and total export sales in excess of $400 million. Hair care, Fragrances and Skin care products continue to be the top performers in the Brazilian market with a continued use of exotic natural ingredients many of which are derived from the Amazon. As the 7th largest cosmetic market in the world and the 2nd largest market for children’s cosmetics globally the Brazilian market offered significant market potential for our client.

The Challenge

While there are numerous locally owned privately held cosmetics companies operating in Brazil only a small portion have revenues in excess of $100MM. Additionally many of these companies have significant contingent fiscal and labor liabilities or lack the types of operating standards that an American company expects which could make a deal potentially problematic.

The Solution

After conducting an assessment of the market we identified a local company with approximately $125MM in revenues and a CAGR of 25%. The company was a market leader in a number of categories and had been successful in taking shelf space away from L’Oreal. However after completing our initial due diligence we identified a significant amount of contingent fiscal liabilities which would have made a direct equity participation by our client in the target company impossible. In order to complete the deal we created a NEWCO which was 51% owned by our client with the remaining 49% owned by the local partner. The NEWCO was capitalized with $100MM from our client with a call option that would allow the equity in the NEWCO to be exchanged for equity in the local company at a defined time and EBITDA multiple. The creation of the new company gave our client access to local manufacturing, marketing and distribution of their key products while avoiding onerous import tariffs. Additionally it gave the local company access to new products, processes and markets. Concurrently with the support of independent auditors the local company will be able to resolve their contingent liabilities and be able to bring their accounting practices to acceptable international GAAP standards making an eventual equity swap possible.