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VISUAL Case

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Motivation of the Investment. Due Diligence Key Findings. Structuring of ... distributing several leading brands on an exclusive basis (Police, D&G, Gucci, ... – PowerPoint PPT presentation

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Title: VISUAL Case


1
VISUAL Case
  • Aziz MEBAREK
  • AVCA Conference November 2006

2
Agenda
  • Motivation of the Investment
  • Due Diligence Key Findings
  • Structuring of the Deal
  • And the Deal Turned ?
  • Lessons Learned

3
Motivation of the Investment
  • Successful company distributing several leading
    brands on an exclusive basis (Police, DG, Gucci,
    ...)
  • High growth potential
  • High margins
  • Fully functional optical lens manufacturing
    plant
  • Identified a very attractive opportunity create
    the first organized optical distribution chain,
    by opening new stores and teaming up with a
    leading European technical partner (One Hour Lab
    Concept)
  • Strong potential for an attractive trade sale
    exit.

4
Due Diligence - Key Findings
  • Due Diligence conducted
  • Full review of the legal environment.
  • HR assessment.
  • Limited review of the accounts and full audit of
    the stocks and receivables.
  • Full review of the supply chain flows and the
    distribution contracts.
  • Key Findings
  • Legal difficulties identified Devised the ways
    to solve them through a legal consultation.
  • One-man show conducted by a lunatic, disorganized
    and inflexible owner.
  • Accounts in big disarray (high fiscal social
    potential liability) - Very large inventories
    (part of it over 2 years old)
  • Solid distribution agreements with the
    willingness of the main suppliers to expand the
    VISUAL brand portfolio.

5
Due Diligence - Key Findings (contd)
  • Key Findings
  • Functional industrial equipment for mineral lens
    production (largest share of the market).
  • Very strong high growth market, increasingly
    sophisticated, with grey market problems
    identified.
  • Confirmed high margins translating into an
    attractive business plan.
  • Due Diligence conducted
  • Review of the industrial process.
  • Market study.
  • Validation of the business model.

6
Structuring of the Deal
  • Made an offer, prior to completing the due
    diligence, to acquire 37.5 of the share capital
  • After DD, decided to go for a majority deal and
    bring a new MD to work along with the current
    owner
  • Heavy provisions on the stocks (approx. 70 of
    their book value) and receivables
  • Created a new company, which acquired the assets
    in order to reduce potential liabilities (fiscal
    and social)
  • Recruited a skilled Industrial Head.
  • Acquired only real assets in a confirmed and
    promising business, with a reinforced managerial
    team, despite certain remaining threats that
    should be manageable.

7
And the Deal Turned Sour
  • Bipolar style of management did not function
    previous owner had to exit
  • Visibility of the new company was such that a
    strong lobby of opticians formed against it
  • Boycott of the VISUAL brands
  • Lobby with the authorities against the opening of
    new VISUAL stores (legal solution found but lobby
    proved to be the more significant obstacle).

8
And the Deal Turned Sour (contd)
  • Growth of the grey market at the expense of
    VISUAL (consequence of the boycott and the
    learning curve of the new team in place)
  • Consumption habits evolved quickly leading to a
    drastic shortening of the fashion cycle the
    inventories acquired for a fraction of their cost
    turned out to be totally worthless
  • Market shifted from mineral to organic lenses.

9
and the Deal Turned Sour (contd)
  • Outcome
  • Sales shrunk heavily, leading to a serious cash
    squeeze (VAT generated at the time of the
    acquisition could not be recovered as budgeted)
  • The financial lenders started losing faith in the
    company but continued nonetheless to provide
    financing because of Tuninvests involvement.
  • After 5 years of heavy battles and a second round
    of financing (to reach a total invested amount of
    about USD 2.5 million), we decided to stop sold
    80 of the investment back to the initial owner
    against his commitment to reimburse all the
    companys debtors
  • Tuninvest (the Fund Manager) ended up paying an
    extra USD 0.4 million from its own pocket to
    preserve its image with VISUALs suppliers.

10
Lessons Learned
  • Never underestimate the impact of a strong grey
    market (especially when VAT and customs duties
    are very high)
  • Never underestimate the power of a professions
    lobby
  • Never lose sight of important shifts in market
    trends
  • Never overestimate skills vs experience for
    certain specific sectors
  • Dont throw good money after bad money
  • When making a majority investment in a small
    market, your liability is not really limited
  • Exiting is usually very tough in the PE business.
    But exiting as we did in this case is the easiest
    thing. This is the scenario to avoid at any cost
  • Our involvement went beyond what is normally
    expected because we had to preserve our image and
    reputation (all debtors had to be reimbursed).
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