Private equity doesn’t always “work”. Hopefully this comes as no surprise. Private equitys’ involvement in the car wash sector is no exception. The formula which combines outside money, tenured industry experts, and a fitting and applicable industry is far from infallible. There are an abundance of extraneous variables that convolute the equation and can change whether the final result is that of success or not; both for the companies and the investors.
With the increase in private equity and outside investor activity in the space today, it’s important to realize that this is not the first time this has happened. Outside investors have historically poured into this industry with the promising glimmer and hope to consolidate a fragmented world with high margins.
The history of private equity in the industry is long, involved, and nuanced. The historical depth makes covering this topic in a concise format difficult. It is for this reason that this article takes a narrowed approach by discussing just one singular company and its journey and evolution over time; International Car Wash Group (aka “ICWG”).
ICWG is a particularly illustrative and interesting subject under the current lens of focus. Not only is it the largest single car wash operator in the world, but also has a deep and rich history of being owned by a full roster of different private equity investors throughout its’ existence. ICWG and the Company’s history exemplifies many of the key tenants and trends of private equity’s involvement in the sector which make it an ideal showcase example.
ICWG, IMO, ARC… The Company:
ICWG was originally founded back in 1965 in Germany under the name IMO. The company still operates under the name IMO in non-US locations. The name Bluebrook also exists in the Companys’ history, along with ARC. Despite the many names, it is the same company, and for simplicity, IMO / ARC / ICWG and Bluebrook will be referred to as ICWG for the rest of this piece. Furthermore, this exploration will focus on ICWG’s history post Bridgepoint Capital becoming involved in 1998.
The Visual History of ICWG and its Owners:
ICWG → What Makes the Company Different:
Before delving further it’s important to layout the nuances that are unique to ICWG as a Company. All companies are unique and different from their competitors in some ways. These differences do not always make the analogous extrapolations and ability for peer comparison null and void. However, one should at least be aware of them and take them into account when drawing insights from such exercises.
Firstly, ICWG is international. With different towns in the same state having different demographic and consumer patterns in the car wash industry, one can only imagine the extent this is true across different continents. Along with being international comes both good and bad. A company can mitigate certain geographically specific risks. However, this exposes a company to new challenges in the way of management, consistency, and scalability, among many others. It is fair to say that this international footprint and history does not mean ICWG is simply incomparable to that of domestic only endeavors, but it does introduce some inherent differences.
Also relatively unique to ICWG is its transformational mega acquisition past. Essentially, ICWG experienced one single acquisitive transaction that grew the Company to an extent unrivaled by all other acquisitions in the Companys’ history. Often times an acquisitive growth strategy, especially in a fragmented industry, manifests itself through many serial small-to-medium sized acquisitions. Although ICWG certainly did, and still does, partake in said strategy to some extent, it was the single acquisition of Toman Group in 2002 that skyrocketed the size of the ICWG business to the +800 wash number.
Bridgepoint Capital - Big Growth Strategy:
Bridgepoint Capital became involved with ICWG in 1998 with a very clear objective and strategy; growth through acquisition. Armed with an executive team largely consistent of ex-oil industry execs, including Bret Holden at the helm, the strategy was clearly set. Bridgepoint paid ~￡ 115mm for ICWG and wasted no time getting their shopping spree started. This is evidenced by their massive 2002 acquisition of the former sister German company Toman (which was actually spun out back in 1990 to free capital for UK expansion), as well as many others. Overall, during the roughly five years that Bridgepoint Capital owned ICWG, it doubled the company’s size in terms of number of washes. It is fair to say that Bridgepoint Capitals’ ownership of ICWG was a success. The Company disclosed that during this time, not only did the number of ICWG washes double, but EBITDA tripled.
JPMorgan Partners - Small Growth:
JPMorgan Partners entered the ring in 2004 when it purchased the now behemoth of ICWG from Bridgepoint for ￡ 350mm. JPMorgan Partners, the internal private equity arm of JPMorgan at the time, did not continue with growth at the same pace as its predecessor. JPMorgan kept Bret Holden as CEO when they bought the Company. However, they came in with the mission of focusing on the operational side in an effort to even further provide an absolutely best-in-class offering more so than ever. This is not to say they halted acquisitions and new development growth, but rather simply slowed it down a bit. JPM wanted to increase market share of pre-existing washes under the Companys’ umbrella.
JPMorgan held ICWG for roughly two years, and made what can be presumed as a favorable exit by selling it in 2006 for ￡ 450mm. This is most certainly one of those times where not having full financial performance and the details of purchase price consideration and structure only provides a partial picture. Conclusions as to investor return should be drawn cautiously.
Carlyle - The Bust:
The most tumultuous and interesting portion of ICWG’s history is undoubtedly its time with Carlyle.
Carlyle purchased ICWG from JPMorgan Partners in 2006 for a total purchase price of ￡ 450mm. Carlyle entered this investment with a goal of achieving incremental growth on top of what the established and record setting juggernaut had already achieved. Carlyles’ initial press release even cited Andrew Burgess, a Managing Director of the Carlyle Group stating “…we believe there are significant further growth opportunities across Europe”. Bret Holden even said in that same acquisition announcement that “We believe Carlyle will be well positioned to help IMO ramp up growth and further expand the business geographically”.
Carlyle’s investment in ICWG was a complete failure; plain and simple. Carlyle lost everything. Not only it’s nine figure initial equity investment, but also the money that it further injected in 2008 in the form of mezzanine PIK debt in an effort to stem the bleeding. Carlyle was forced out in a landmark restructuring case in which mezzanine lender rights and valuation approaches were pushed to a level of unprecedented attention. Without going into the details of the now legendary case, let it suffice to say that Carlyle and the junior creditors did not win in the restructuring process. Ultimately, control of the Company lay in the hands of the consortium of senior lenders.
From a high level, the cause of this restructuring was the Company reaching a point of no longer being able to comfortably and confidently service its debt obligations. This presented itself in the way of the Company breaking financial covenants with creditors. Carlyle even tried to convince creditors to allow for the Company to do sale-leaseback transactions with owned washes and properties to provide an immediate influx of cash flow to keep the company afloat (a practice that is now relatively commonplace in the industry today). Overall, Carlyle stated that it was a combination of both the global economic conditions and two years of unfavorable weather.
Avoiding any opinionating as to true causation, and in an effort to provide unbiased objectivity, let us delve into the takeaways that can gleaned through purely factual and public data:
- Car Washes are NOT Immune to Recessions
A common misconception often propagated and reinforced is a false definition of what it means for an industry or business to be “defensive”. Without getting into the nuanced differences between a lower correlation coefficient and that of a negative one, a defensive business, more often than not means it is impacted less than the overarching economy. It does not mean that it is not impacted at all. It also does not mean that in a down economy the subject actually does better on an absolute basis. It rather means that it has a numbed downside elasticity under said circumstances.
Many people often refer to car washes, especially the lower ticket price express model, as being very “defensive”. It is true to some extent but is often misconstrued. With the recent and continued advent of the lower ticket price model, it is worth bringing this up. Even if more people who were doing higher price (let’s say full service type) washes move down to lower price tier express washes, the denominator, or overall population, still shrinks. So although the ratio of numerator to denominator of these lower ticket price relative market shares increases, the absolute value and top line decreases.
- Capital Structure is Important - Car Washes Are No Exception
Capital structure and debt loads are not always the cause of a businesses problems; even when aggressive and highly levered ones are used. Sometimes, capital structure isn’t the actual impetus of a problem, but rather the inhibitor of finding a solution to a problematic situation. And sometimes, capital structure has absolutely nothing to do with a problem at all.
Being an undoubtable point of highest contention in relation to Carlyle and ICWG’s situation, the facts must at least be addressed here. Without delving into a debate of what financial prudence means in regards to forming a capital structure, and without the hardest of figures, let us just discuss what we do know.
Carlyle Levered the Business Carlyle originally bought the company with a mix of both debt and equity for a total purchase price of ￡ 450mm in 2006. At the time of the 2009 restructuring, there was ￡ 403mm of total debt (￡ 313mm of which was senior debt). Courts agreed that the Company was simply not worth anything over the fulcrum point that would allow for junior creditors to hold any residual claim of substance, or in other words, they agreed and ruled that the PWC prepared valuation analysis that ascribed a total company valuation of ￡ 265 max was realistic and accurate, therefore assigning zero value and rights to all junior creditors and equity holders. Published financials from the first half of 2018 showed that the Company had pro-rated leverage of ~8-9x.
Carlyle Paid More per Wash Than JPMorgan Partners Carlyle purchased the business for a significantly higher price without many more washes than the prior buyer. Carlyle specifically paid ~30% more (in total purchase price consideration) than the sellers to which they bought it from had paid just two years prior. The wash at the time of Carlyles purchase had only ~7% more washes than that of when the prior buyer and current selling counterparty, JPMorgan Partners, purchased it in 2004. We do not have the entire picture here and in the absence of comprehensive profitability figures, it is unfair to insinuate that Carlyle definitively “overpaid”, let alone that they even paid a higher true cash flow based multiple.
- Just Because the Investor Before You Made Money Does NOT Mean You Will… Even If You Buy the Same Company
This is certainly the most ambiguous of the takeaways, but not to be undervalued. With private equity hands back in the mix, this is a great example of how the same company, albeit different macro market conditions, does not result in the same investment performance. This is even more true for highly operator discretionary businesses such as car washes. Though a simple and intuitive point, it often seems to be forgotten and demonstrated through a piggyback “me-too” tendency that appears to unshakably lurk behind private equity, following them into many industries it becomes heavily entrenched in.
TDR Capital - Bargain Hunting & U.S. Expansion:
After much turmoil, after a drawn out sales process in which a 2012 bid was rejected only to come back in a different form and accepted years later, TDR Capital had finally bought ICWG in 2014. The exact terms of TDR’s purchase were never disclosed, however it was openly rumored and speculated that TDR Capital paid in the tune of ￡ 250mm for the Company. If the widely accepted rumors are true, it appears that the restructuring judgement back in 2009 was pretty spot on in it’s valuation conclusion. TDR Capital had openly been looking at ICWG since 2008 and was well up to speed on the Company by the time their offer was finally accepted.
TDR Capital hit the ground running with a clear and openly stated mission - use the cash cow of what currently exists to focus on disciplined accretive acquisitions in the U.S. market. TDR did exactly that during their time with ICWG. It was under TDR Capital that ICWG entered the U.S. market and by the time TDR was to exit their investment, they would have a presence of over 110 car washes in the U.S. Under TDR, ICWG did more than just the U.S. entrance. The Company also invested significant capital and effort into a refurbishment programme, Australia development, and evening established plans for opening washes in China.
Roark Capital - Today:
Roark Capital is the current owner of ICWG and purchased the Company in 2017. Roark Capital has made their aspirations involving the company completely public, concrete, and crystal clear; to grow ICWG to be the leader in the U.S. market. Roark is certainly well on their way already having over 150 washes in U.S. (with the Companys’ most recent being the acquisition of two Wash N’ Roll sites just this past May of 2019). The order is tall to say the least and ICWG certainly has their work cut out for them as they currently sit at just half the size of Mister in the U.S.
Private equity is here in the sector and shows no signs of slowing down their involvement. It is not the first time this has happened. Although we only delved into the history of one specific wash company today, I assure you there are many others (some still around today and some no longer in existence), with deep and interesting histories of financial sponsor involvement.
The car wash business, despite often being viewed as simple through outside eyes, is extremely operator discretionary and is not a naive pure plug and play model. Sure, it is most certainly not rocket science. But rocket science isn’t as competitive of an industry and they don’t often have to worry about part time employee turnover.
Even with this, the industry as a whole is undeniably attractive for private equity and external investors; and rightfully so. It’s a wonderful and fertile land for growth, operational efficiency improvement, rollup synergies, and stable high-margin cash flows. That said, it does not mean that being successful is as easy as paying enough to build an empire. As with all investment strategies, judicial approaches and financial prudence are crucial. A rising tide lifts all ships, and the lack of the aforementioned strategies and tenants can be absent while still experiencing success in said waters, it is when the tides shift that they become mandatory to survive and weather the storm.
As has happened before, and as will happen again, there will be winners and losers, not only company by company, but investor by investor as well.