Thrasio: M&A Value Arbitrage at Another Level
In our previous posts, we talked about how to significantly grow and arbitrage equity value from M&A, along with the right type of acquisition financing. You can read about it here. In short, larger strategic acquirers that trade at higher multiples are purchasing smaller companies that trade at lower multiples because of factors like size, profitability, barriers to entry, and economies of scale. By acquiring these companies, acquirers can immediately realize an arbitrage on equity value once the purchase is complete. This is due to a stark difference in valuation multiples, and the usage of debt against the pro-forma (combined) profitability, which allows the acquirer to experience limited dilution as a result, while materially growing the equity overnight. This is only compounded by the acquirer being able to grow that target’s revenue and earnings.
One company is applying this idea on a massive scale. Thrasio, acquires 3rd party Amazon Fulfillment by Amazon (FBA) sellers and direct-to-consumer eCommerce brands, plugs them into their operational engine, and generally drives higher revenue and profits as a result. They identified early on, a massive untapped opportunity for a roll-up of well performing, profitable businesses, at extremely low multiples, with an opportunity of instilling best practices, to enhance performance and thus value. Over the past 2 years, Thrasio has acquired nearly 100 companies. Thrasio saw a market opportunity in the digital consumer goods space with a target market of around 2 million Amazon 3rd party sellers, with more than 450,000 of those sellers and 66% of the top 10,000 sellers using Amazon FBA. Thrasio noticed that larger FBA sellers were finding it more and more difficult to operate their online businesses due to their size. Most of these companies also struggled to find quality acquisition opportunities, until Thrasio came in to dominate 40% of the M&A market.
Since consumer goods have such high fixed costs, including production, marketing, and not to mention the fact that Amazon takes around a 15% cut from 3rd party sellers, even the top sellers generally only had a high single digit % EBITDA margin. That, along with the limited competition from an acquisition perspective, has allowed Thrasio to purchase such companies between 2-4x TTM EBITDA, which such multiples are well below industry norms (healthy, generic business sell in the ~5-10x EBITDA range. Not talking about sexy, high growth, tech oriented or software). Then, Thrasio brings these brands and their products into their operational “machine” and finds ways to optimize every segment of their business model.
As you can see in this graphic, Thrasio uses data analytics as well as pairing the purchased companies with their internal marketing, supply chain, and other operational teams to maximize the brand’s value and financial performance.
By improving their products and streamlining their operations, Thrasio helps its companies get valuable designations like the “Amazon’s Choice” badge, which, on average leads to a jump in sales of around 20%. As a result, most of Thrasio’s brands have seen astronomical growth, with an average of 233% revenue growth year over year. In 2020, Thrasio’s revenue exceeded $500M, and their profit was over $100 million. After their most recent capital raise, a $500M senior debt facility, Thrasio was valued at over $1B, giving them at least a 10x EBITDA multiple, which as you recall above, they generally pay between 2-4x TTM EBITDA for their targets.
Below is a high-level analysis of what a typical deal may look like for Thrasio, and the expected ROI as well arbitrage they would realize:
As you can see above, due to the stark difference in valuation multiples, Thrasio generates a 3.6x return day 1. Then by adding in the average expected lift in growth, Thrasio generates an 8.4x!
The question remains, how long will they have this opportunity, as a half dozen more acquisition companies, who collectively have raised another half billion, have recently entered the market to directly compete w/Thrasio. These additional Amazon FBA acquirers or aggregators that are newer entrants include Heyday, Perch, SellerX, Boosted Commerce, Heroes, and Razor Group.
Other challenges include integration, which now includes a 500 step process, born out by a lot of trial and error, being a first mover in the space. Also, there is the “platform” risk, being beholden to sudden changes and limitations by Amazon, as well as the allegations, of the platform gathering data from the most successful, profitable products, and creating competing products, under its Basics brand.
The counter to this is if Thrasio continues to optimize its operations and growth, through continued trial and error, which drives better performance of its existing brands as well as future brands, and thus is likely to see an increase in its own valuation multiple, and therefore can pay higher multiples for new acquisitions. This may result in a rising tide lifts all boats scenario, and the net net is likely to be a wash. Only time will tell how this business fares in the end, by way of a public offering, or acquisition, which will provide the ultimate barometer of success.
For those looking to learn more, feel free to listen to the This Week in Start Ups podcast with the CEO of Thrasio, where he shares his story, strategy, etc.
For those seeking to explore acquisitions to realize a material arbitrage (of course not on the same level as Thrasio), and supplement your organic growth, feel free to email cmaghami@harborridgecap.com to discuss the opportunity, and we can provide feedback across the board.
Sources:
https://www.pymnts.com/news/ecommerce/2021/thrasio-seeks-bigger-acquisitions-after-landing-500-million-in-new-financing/#:~:text=Thrasio%20saw%20its%20revenue%20surge,10%20American%20households%20last%20year. https://www.digitalcommerce360.com/article/amazon-seller-news/ https://www.feedbackexpress.com/amazon-1029528-new-sellers-year-plus-stats/https://www.ft.com/content/9a9cc7e0-e406-477c-bc15-28d6d250c29bhttps://thisweekinstartups.com/e1094-thrasio-co-ceo-josh-silberstein-acquires-operates-60-amazon-brands-shares-insights-on-mastering-the-marketplace-competing-with-amazonbasics-more/