ASX-listed company BWX is the latest case study of a significant retail brand collapsing under its own weight. Just last month, the beauty business entered voluntary administration, with its valuation plummeting faster than face cream on a hot day.
While softening demand, excess inventory and an over-leveraged balance sheet were contributing factors, it was the hangover of its toppy acquisitions that put the final nail in the coffin.
In this financial teardown, I’ll break down the history of BWX, its financials, and how its aggressive acquisitive strategy ultimately led to its downfall.
BWX Limited is an ASX-listed company based in Victoria, Australia that develops, manufactures, distributes, and sells natural skin and hair care products.
Originally founded in 1993 by then-managing director, John Humble, the company was built up primarily by inorganic growth — in other words, growing by buying up other brands. Their aggregator strategy was to build a ‘house of brands’ in the skincare category.
In 2015, BWX made its debut on the stock exchange after raising pre-IPO funds to acquire Sukin, its first significant purchase in the Australian skincare market. And the buying spree didn’t stop there. Here’s a rundown of their other acquisitions:
For additional context, here’s a summary of the revenue contribution by each brand in FY22.
All the acquisitions were designed to increase market share and revenue. Below is a summary of the revenue growth they achieved over time.
BWX’s revenue has significantly increased over time, primarily driven by its acquisitions.
But how much did BWX pay to “buy” this growth?
The table below shows a summary of all the acquisitions and implied multiples.
The business has had a history of paying pretty toppy multiples for its acquisitions, which is reflective of the eCommerce and FMCG hype of the roaring ‘20s.
A few comments here:
It’s worth noting that the acquisition of Go-To was a bit different from the others. BWX only acquired 50.1% of the company and it came with a hangover — a ‘Put Option’ to buy the remaining half in September 2024.
While the details of this option aren’t entirely clear, it’s safe to assume that the negotiated floor price would be at least as high as the first half. This means that BWX may have a commitment to fork out an additional ~$90m to acquire the rest of Go-To in 2024. We’ll come back to this point shortly.
Paying 15x EBITDA (which, as a reminder, is rarely the same as cash flow) is pretty, pretty toppy.
So, how could BWX justify these crazy acquisition multiples to shareholders?
Cast your mind back to the COVID era of 2021, when the government’s money-printing frenzy resulted in an abundance of cheap capital that inflated asset valuations.
At its peak, BWX was trading at 27x EBITDA. Because of its much higher valuation multiple, BWX was essentially getting earnings accretion on the companies it acquired at a lower multiple.
For example, in late 2021, it bought 50.1% of Go-To Skincare at a lofty 15x EBITDA multiple. BWX could argue that was a good deal, because the company was trading at a much higher 27x EBITDA. This allowed BWX to leverage the multiple arbitrage to its advantage, meaning that every dollar of Go-To’s EBITDA was worth 1.7x more to BWX.
From a strategic perspective, Go-To was the high growth, dynamic, sexy brand, marketed to a younger audience — founded by the influential author and celebrity Zoë Foster Blake (boasting 792k IG followers).
Side note: I asked my wife Liz if she had heard of Zoë Foster Blake (or ZFB for short). Her response was, “Do you live under a rock? There’s a bottle of Properly Clean Facial Cleanser literally on our bathroom sink!”
I then learned she’s married to the (much less successful) Hamish Blake from Hamish and Andy.
I am clearly a man of culture.
Anyway, Go-To’s main sales channel is eCommerce. This direct-to-consumer (DTC) model gets closer to the customer and generates high-profit margins compared to some of the older, more traditional brands in the BWX portfolio.
For these reasons, BWX had to have Go-To.
The market backed BWX’s decision to pay this lofty price as it pulled off a $100M capital raise to fund the acquisition.
Eleven consecutive interest rate hikes starting from May 2022 caused a market correction, and BWX came crashing down with it.
It is now in voluntary administration.
Looking back, 2021 was the peak of eCommerce, and CEOs have spent the past 18 months adjusting to this ‘new normal’ of softened demand, higher customer acquisition costs and overstocking issues.
Operational and working capital issues aside, public companies that paid toppy valuations on acquisitions funded with debt are also facing material impairment losses in their accounts.
BWX recorded a whopping $322m in impairment expenses in FY22, which is 1.5 times its revenue for the year!
The result was a net loss of $351m in FY22.
An impairment loss occurs when a company’s assets, such as investments, have lost their value, and the company has to write down the value as a loss on its financial statements.
This happens when the value of the asset recorded on the balance sheet exceeds what it is worth. It’s an accounting treatment designed to ensure that public companies accurately reflect the value of the assets on their balance sheet, without inflating them.
Impairment losses are generally a very bad thing. It means your assets are worth less than what you paid for them.
For BWX, it was a whole lot of bad.
So how does a company and its accountants go about re-valuing these assets?
Every year, the bean counters and the bean counter police (aka auditors) do what’s called an ‘impairment test’. They basically do a discounted cash flow valuation (DCF) on each business. If the valuation is lower than what is recorded in the accounts, an impairment loss needs to be accounted for.
The broad inputs that go into a DCF valuation are:
BWX bought their business in an era of cheap capital (low-interest rates) and solid consumer demand due to government stimulus and money printing. At that time, the cost of borrowing money was lower and the growth rate was higher, so it made sense to pay more for the assets.
Now let’s consider these inputs in the context of a slowing economy and high-interest rate environment.
Being a premium skincare provider, BWX is particularly exposed to changes in consumer discretionary spending, which has not only impacted the company’s operating performance, but also impacts the write-down of the assets it bought.
The net result was a $322M write down. Whilst this is a “paper” expense, impairment losses don’t instill confidence in lenders and shareholders that the executive team knows what they’re doing. It displays poor investment discipline.
BWX had a whole set of operational issues to deal with, like cash flow losses, tanking share prices, and debt servicing. But the thing that really sealed their fate was that darn Put Option to buy the remaining 49.9% of Go-To. It was the final nail in the coffin for them.
When you have a distressed business, the CEO has to make sure that all the creditors have confidence in a turnaround plan to trade through the tough times. In BWX’s case, the largest secured creditors were the banks that lent all the money to BWX to fund acquisitions.
Let’s take a look at BWX’s balance sheet as of 31 December 2022 – the most recent financial report they’ve released.
Let’s unpack this balance sheet.
This is especially concerning news for the secured creditor CBA, which is owed a whopping $100.9m. The debt facilities were supposed to expire in 2024, but so was the looming Put Option of $59.2m — which means BWX had to somehow come up with that money as well. Unfortunately, they don’t have a lot of options available to them.
Now I don’t know if this is the case or not, but I can only speculate that CBA worked out that putting the business into receivership would mean they would solidify their security and get first dibs of getting paid back their loan — before having to pay for ZFB’s remaining 49.9% share of the business.
In other words, CBA continues to be the first-ranked secured creditor, giving it the best chance to be repaid, and ZFB falls to the bottom with all the other unsecured creditors.
So, what does all of this mean for Go-To? Well, it’s yet to be determined, but I can bet that the administrators are in deep negotiations with ZFB about a few possible options:
It will probably mean ZFB taking back full ownership of her company, plus keeping a large chunk of the $89m she sold it for just 18 months ago!
It’s a pretty crazy and wonderful outcome for her.
BWX is a valuable case study on how a company can fail as a result of an aggressive acquisition strategy and a lack of investment discipline amongst the Board and CEO.
As the economy and market continues to correct, we may see more companies succumbing to similar pitfalls.
This article was first published by SBO Financial.
Jason Andrew is a chartered accountant and founder of SBO, an accounting and operational finance firm serving small businesses globally. He’s passionate about helping business owners extract value from their numbers and data.
