PricewaterhouseCoopers

Retail & Consumer Outlook – Australia

2007 – Changes in play

We have a single motto at The PAS Group: “We do what makes sense.” I am sure this is a common goal, but it has become much easier within a private equity-backed business.

The PAS Group was formed in 2004 to pursue a roll-up strategy of acquiring quality businesses in the Australian wholesale apparel market. Our companies include Yarra Trail, Breakaway, Designworks, The Hopkins Group, Review, Capelle and Fiorelli, whose products are sold through thousands of retail outlets across Australia.

The primary private equity owner is DB Capital Partners, which holds the majority of shares of the business through its managed funds, with The PAS Group management holding the balance.

I’ve worked in the retail, wholesale and licensing industries for more than 25 years in a range of senior roles. These included managing Myer’s Private Brand division and being Asia Pacific regional director for Reebok based in Hong Kong. Even with all this experience, I believe the private-equity backed approach we are using at The PAS Group is the best business model for operating and growing a business like ours.

Private equity is enabling us to build scale in a fragmented sector and to grow both organically and through acquisitions. The group’s annualised EBITDA has climbed from $5 million in our first year to $14 million in the second, and in 2007 we are on track to do in the region of $30 million.

Companies that we acquire can expect to change. Smaller businesses in the highly competitive world of apparel tend to run on minimal resources and business infrastructure. Managers work in the business and have little information about the wider market. They also have few peers to share ideas with.

The first thing we do after acquiring a company is enhance its reporting systems and support. The most crucial step here is to improve financial controls, in some instances installing a financial controller for the first time. Then we work with managers in the business by taking a helicopter view of their operations and market opportunities, and by assisting in the creation of business plans.

With these plans in place, we are investing for growth. At Capelle, we created new product divisions. We have enabled Designworks, which provides private label clothing to department stores as well as its own branded Jay Jays and Myer. The Hopkins Group has introduced a new brand that has been picked up by David Jones and Myer. I’m pleased to say that we have added jobs across the group since our foundation, contrary to the common perception of private equity ownership.

Notably, we haven’t rushed to replace the information technology systems at our group companies, preferring to stick to the idea that “if it isn’t broken, don’t fix it”. Indeed, a key part of the private equity ownership model is that the investment horizon is relatively long compared to that in the public market and you can concentrate purely on what is right for the business.

For companies considering working with private equity investors, I think it is important that the managers of the business and the investors find their appropriate space. In our case, we rely on DB Capital Partners for its knowledge of leveraged finance and transactions. A representative is also on the board and we talk regularly about events and opportunities. Over time we would expect DB Capital exit, most likely through an IPO or a trade sale.

Day-to-day management of the business rests of The PAS Group team and the individuals leading our businesses. We are fortunate to be supported by an experienced board including chair Bob Dalziel, formerly at Mayne Group and Coles Myer.

I believe the key to the private equity model is the board and the management team that is running the organisation. The strength of our business is the aligned board, with each board member providing valuable input in their respective areas.

I don’t see the growth of private equity slowing down in the Australian retail and consumer sector. The presence of duopolies tends to lead to complacency and create opportunities for private equity managers. The fragmentation of other parts of the market is also an opportunity, as we are realising with The PAS Group.

Eric Morris, Chief Executive Officer – The PAS Group Pty Limited


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