How private equity unlocked BrewGroup’s future

Finding an equity partner at the right time provides the key to going to a whole new level much faster, writes Colin McKinnon.  

When Mark Hamilton arrived at Bell Tea as chief executive in 2005 he took over a business that had been under the same ownership for 50 years and was almost exclusively concerned with selling tea.  

He explains: “The business was all about tea when I arrived and had been owned by Foodstuffs for 50 years. It was centred on tea as a strategic product for supermarkets and of course Bell Tea did very well at Foodstuffs outlets, but less so at the Progressive stores.  

“When I joined having been a GM at Lion, Foodstuffs was looking at how to take the business to the next stage. It seems obvious now; tea and coffee go together like salt and pepper. So we bought a coffee company, Burton Hollis, which wanted to break into the supermarket trade, and expanded it. It went very well.” 

The business later added or created a number of coffee-related brands, including Gravity Coffee and Jed’s Coffee, to cover the market from supermarket shelves, to cafe counters and workplace brews. Even though the business expanded dramatically, the Foodstuffs board recognised that the business might do even better if they didn’t own it, a move it had previously made with some of its other subsidiaries.  

Foodstuffs sold the business to senior staff alongside private equity (PE) investor Pencarrow in 2013.  

Mark Hamilton explains that the decision to partner with a PE investor wasn’t uppermost in the minds of the management team. “It was not long after the GFC and PE had been very quiet in New Zealand. We expected interest from other food businesses not PE and were surprised when several PE companies as well as some trade investors expressed interest.”
  
He admits that his colleagues took some persuading to agree to the PE route. “Members of the management team negotiating the buyout were unenthusiastic about the PE option. They’d heard all the horror stories from overseas and were well aware of the poor reputation of some PE companies, you know companies being asset stripped, sold off as shadows of their former selves, pots of redundancies, loaded up with debt. But as we looked into it we came to the realisation that PE in New Zealand had a better track record and was more focussed on taking the business forward and growing it.” 

Mark Hamilton says that there was a moment of recognition during their meetings with the PE companies when the PE teams presented their credentials.  

“It was one of the things we didn’t expect; that it was not just us presenting to them but was a two-way process. It began to dawn on us that they were not just a source of funding but also a source of expertise and partners rather than owners.   

“This wasn’t just about finance. We soon understood that they are very smart people and brought a high degree of knowledge to the business.”

“This wasn’t just about finance. We soon understood that they are very smart people and brought a high degree of knowledge to the business. We felt that they understood what was possible. I guess for many in our team it was a change of mind-set; a moment of illumination.   

“I have to say there was a high degree of consistency among all the PE teams we met, but it has certainly been our experience with Pencarrow. Their investment allowed us to grow in the other supermarket areas, expand offshore and grow the coffee business more than 20 percent a year. The shackles were taken off and there were a lot of new opportunities for the businesses.” 

Not that it was all plain sailing. The change of mind-set took some time to get established among the management team.  
 
“We found initially that working with a PE company was very different for us. The PE business model has a very strong focus on cashflow and return on capital. We came to understand that they are business owners not business operators. We only had a portion of their attention and they were much less involved in the day-to-day management than we were used to. It was liberating and kind of strange.  

“Six months in we had a significant financial challenge and immediately they got involved in helping us to develop a strategy to manage it.  They worked to accelerate our investment in the coffee side and advanced those plans. Ultimately that was the catalyst for the company being so very successful. That crisis was the best thing that happened to the business and trust was built between us and Pencarrow.” 

Mark Hamilton says: “Creating a new company identity allowed the business to move on towards its next personal best. Pencarrow really supported management’s vision for building long-term value. It surprised all of us when around the three-year mark we received an unsolicited approach.   

“Dutch company Jacobs Douwe Egberts (JDE) got in touch and quite quickly came down to see us and expressed an interest in buying us. We ended up selling to them and I remain on the board of what is now the largest hot beverage Company in New Zealand.  

Along the way the business dropped the Bell name and became BrewGroup, although Bell was retained as a supermarket brand.  

“I have to say that, from my experience, PE in New Zealand is a great story. I want to share what it can bring in terms of an enormous amount of positivity to New Zealand companies striving to get to the next level, by delivering growth capital. I want more people to understand what PE can do for New Zealand businesses.   
 
“PE is actually about empowerment.  They are not just money guys.  When we understood that they were here to help us implement our plans, it was music to our ears. Yes we had prospered very well within Foodstuffs, but we were able to develop in a very different way with PE.  We found a PE partner at the right time which was the key to going to a whole new level much faster than we had ever imagined.’ 

Colin McKinnon is Executive Director of the New Zealand Private Equity & Venture Capital Association. www.nzvca.co.nz