FINANCE: Private money

Investment firms seeking catalogs

For years catalogers have been pleading their case to the investment community: that their established brands and their marketing, merchandising, and fulfillment experience make them ideal investments. But it seems that private investment firms have only recently started listening.

Of the total number of catalog transactions in the first half of ’99, as reported by investment bank Gruppo, Levey, and Co., 12% involved private investment firms. In the second half of the year, though, that figure jumped to 31%.

Don Libey, formerly a catalog consultant, has been facilitating catalog acquisitions over the past couple of years as president of Philadelphia-based Libey Inc. He contends that investment firms’ recent interest in catalog companies is a direct result of their earlier enthusiasm for virtual-only marketers. “Internet start-ups have the technology and the know-how to reach people, but they haven’t a clue about fulfillment, ordering, or other customer-service-related fulfillment and retention matters,” says Libey, who is looking into setting up his own fund for private equity catalog investments. “The fastest way to get that is to buy established catalog companies. There’s big money in recognizing that a $20 million investment in the Web can be enhanced by a further investment in a catalog company.”

Such is the case at New York-based Freeman Spogli & Co., which in February partnered with Northwest Airlines chairman Gary Wilson and former IBM chief financial officer Jerome York in the $725 million acquisition of computer catalog giant Micro Warehouse. “Very clearly, the catalogers have the skill sets and infrastructure that can be applied to Internet marketing,” says Freeman Spogli general partner Mark Doran.

Like other investment firms, Freeman Spogli has been aggressive in investing, partnering, and buying out numerous pure-play Internet firms and brick-and-mortar retailers as well as catalogers. By investing in all three types of marketers, the firm hopes to leverage and meld the skills and assets of each. At the same time, Doran says, Freeman has long-term hopes of moving more of the orders from its various companies online, supported by catalogers’ direct marketing expertise.

Another New York-based investment firm, Patricof & Co., has a strategy similar to that of Freeman Spogli. “Catalogers are very well positioned to benefit from the growth on the Internet, because they have strong brands in addition to their direct marketing expertise, fulfillment, and customer service,” says David Landau, managing director/general partner with Patricof, which has been investing in catalogs for more than 20 years. One of its recent catalog deals was its September investment of $50 million in Performance Inc., a cataloger of bicycles. “We do have investments in pure dot-coms, but that’s not our primary focus, because what’s really valuable to us are catalogers that combine their deep knowledge of their product categories and how to sell with a good understanding of the Internet.”

Although Patricof has investments in more than 40 Internet pure-plays, the firm’s interest in catalogers, as well as in retailers, has grown more recently “now that the catalogers and retailers are figuring the ‘Net out,” Landau says. “So when we can work with people who know their business, it’s an historic opportunity to have this new channel of distribution in which the best companies and brands will win.”

Complementary catalogers

While the new interest in catalog companies may almost inevitably result from investment firms’ need to complement their online investments, it may also stem from the sheer volume of capital available today. Venture capital investments more than doubled in 1999, to $36.5 billion from $14.9 billion in ’98, according to a study by the National Venture Capital Association and research firm Venture Economics. The report adds that more venture capital funds were invested in ’99 than in the previous three years combined.

“In the long run, catalog companies provide the asset base to compete effectively for market share,” says Ted Pamperin, chairman of Summit, NJ-based mergers-and-acquisitions firm American Catalog Partnerships. “A lot of venture capitalists and secondary placement firms have significant amounts of money that they’re trying to put to work.” Moreover, “they’ve looked down their lists of alternatives, and investment opportunities in catalogs are surfacing because they’re being seen as valuable assets for the Internet marketplace,” he says.

And thriving catalogers may well represent better long-term investments than Internet firms do. Catalog consultant Larry West, president of New York-based West & Co., believes that in recent months, investors are seeing catalogs as a better value than the pure-play Internet companies, few of which are profitable despite their sky-high valuations. “Investors are perceiving catalogers’ existing resources and their ability to generate cash as more important than they did last year,” West says. “At the same time, they’re seeing that the catalog and Internet channels can be very nicely synergistic, so they need both forms” in their portfolios.

Looking toward the remainder of 2000 and beyond, no one expects catalog companies to become as wildly attractive to private investment firms as the virtual-only companies have been. But most sources agree that interest in catalogs won’t cool off, either. “There’s a lot of money flowing into private equity groups,” says Kelly Armstrong, a vice president at investment bank First Union Securities, “and they have to allocate these funds to good ideas that will complement their Internet interests.” And many of these “ideas” will continue to be catalog companies, she believes.

For his part, Libey thinks that the highly publicized fulfillment disasters some dot-coms experienced during the last holiday season will keep investment firms interested in catalog companies for some time. “After last Christmas, even if Internet fulfillment problems affected only about 10% of consumers, that was enough for Wall Street to seek catalog companies with fulfillment knowledge,” he says. “Our firm, for example, has some 15 buyers looking for established catalogers on a fulfillment basis. We don’t care what kinds of products these catalogers are selling; we just want those that know how to fulfill orders flawlessly.”

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