“We don’t have major complaints about the credit itself, but the docs are a tough sell and we’re struggling to get clear answers to our questions from the teams,” said one buysider, a frustration two others echoed.

The deal is structured on FY June 2021 numbers, which three buysiders worry are “dated”, though balanced by HY June 2022 forecasted figures. Marketed June 2021 EBITDA stands at $376m, with add-backs including cost-savings, growth investments and Covid impact. Marketed EBITDA for June 2022 is $419m. Three on the buyside put the business’s EV at 11.2x or 10x respectively.

Marketed senior secured leverage is 4.6x on 2021 numbers or 4.1x on 2022. 

Banks have already responded to buysider complaints on a margin ratchet set inside 2022 leverage guidance. On Monday, three stepdowns at 4.5x, 4.25x and 4.0x net senior secured leverage were cut to two stepdowns at 0.5x inside opening leverage instead.

The margin ratchet had formed the centre of buysider complaints. “It’s a huge deal for us,” said the first buysider. Originally guiding at E+400-425 bps, a second buysider asked of the deal: “I like it at even 400, but if I know this is going to be towards 350 in six months, do I like it then?”

Now, with guidance at E+375-400 bps, some remain unimpressed. A third buysider said: “They’ve cut the ratchet but also tightened pricing, so it’s tit-for-tat, it hasn’t changed our thinking massively.”

“It’s a very strong credit, but it all comes down to price,” said the first buysider. OID guidance has also changed, straightened from 99.5 to 99.75.

Exacerbating this issue, the deal also includes a +/-15 bps ESG margin ratchet, which asks Wella to improve an ESG rating from a rating agency of its choosing.

A £550m sterling tranche was pre-placed at S+500 bps. A dollar portion was also pre-placed, with buysiders wondering why a company with so much business in North America is opting for such a slim dollar allocation. A pre-placed $300m PIK and a $300m RCF were also raised alongside. Cash stands at $75m pro forma this transaction. 

Funds partially back a recap for sponsor KKR. Overall, the buyside looked benevolently this, despite coming roughly a year post-purchase. “Some people get emotional about recapping so soon, but KKR still has $1.6bn invested, that’s 38% or the capital structure. And when you look at the EBITDA growth, you can’t really complain,” said the second buysider. EBITDA at the time of the LBO was $253m, according to two buysiders.

Disentangling 

A central question for investors on the deal is Wella’s ongoing carve out from previous owner and market familiar Coty. KKR first purchased a 60% stake in Wella for around $2.5bn in 2020, upping it to 74% last year. Coty retains the remaining 26% share.

A carve out means inherent execution risk, five buysiders say, frequently dragging on longer (and costing more) than originally anticipated. Carve out costs of approximately $250m will make the business cash flow negative in 2022, three buysiders report. “You always ask if that will go on longer than anticipated,” said B6. S&P models separation costs as low as $19m in 2023.

For some, memories of the Flora carve out from Unilever under KKR’s supervision are also clouding their view of the Wella deal.

“The Flora/Unilever carve out under KKR wasn’t smooth, so that’s tainting my impression of this,” admitted a fourth buysider, with two more buysiders concurring. Leviathan Unilever sold its Spreads business to KKR for €6.8bn in 2017. Some on the buyside put troubles down to the carve out process dragging out, with cost saving initiatives not meeting expectations.

Others, however, dismiss the risk. “The carve out is essentially done as of February this year, so that’s significantly de-risking,” said a fifth buysider. Wella also reassured buysiders that, with its RCF undrawn and cash levels increasing, restructuring costs will be manageable for FY 2022.

Wella, Wella, Wella, tell me more

Six buysiders are unanimously positive on Wella as a credit, describing a stable, strongly positioned company, with impressive diversification, limited seasonality and well-known branding. It is second place in the global professional hair and retail hair color sectors (behind IG giants L'Oréal and Henkel), per S&P, and the first place in professional hair color, professional nail care, and premium hair-styling appliances. 

Wella’s primary plus point to four buysiders is its diversification - in its products, end markets, geographies and customers (see charts below).  Its top 10 customers account for less than 20% of total group sales, writes S&P, while its largest region (North America) accounts for just 20% in FY June 2021. Collectively, North America, Germany, Austria, Switzerland, the U.K. and Ireland account for just around 50% of total revenue.

For a sixth buysider, Wella’s revenues dipping just 12% in 2020, was evidence of this strong diversification. “You’d think, given their exposure to salons through lockdown, that would have been a bigger blow,” they said.

Three buysiders labelled Wella’s professional hair as its most impressive segment and retail hair as its weakest. Retail is more competitive, they explained, primarily relying on brand name recognition, with low barriers to entry. Wella’s professional segment, on the other hand, benefits from sticky customer relationships. 

Buysiders also noted impressive brands across Wella’s portfolio, including UK familiar GHD in hair equipment and OPI in nails, and praised Wella’s initiatives to rid their goods of animal products as matching long-term customer trends towards vegan hair and beauty products.

Points of concern on the credit side of the business were, the buyside admitted, largely overshadowed by the above strengths. Roughly 50% of Wella’s costs are fixed, per three buysiders, which did not seem a huge issue as the business is cash generative.

Some on the buyside were seeking more detail on the company’s ability to pass rising costs on. According to the sixth buysider, their main concern was rising freight costs and the time lag on pass-through agreements with wholesalers, which typically exceed those with retail customers.

Receding share-line

A thornier issue for buysiders was a slight decline in its market shares, barring hair appliances, in recent years. At 2021, Wella had 10% of the professional hair market, comfortably below market leader L’Oréal at 20% to 25% - a 140 bps delving between 2016 and 2020, per S&P.

Two buysiders, however, argued focus on this was splitting hairs. “Any declining market share is more than overshadowed for me by the size and strength of the business, and primarily its brands and diversification,” said the second buysider.

Some point fingers at Coty for Wella’s slight decline. Coty did not have a focus on its Wella business, so the argument goes, and under KKR’s stewardship, this can improve. Wella had historically not expanded into faster-growing emerging markets, though this is now an area of growth for them. Wella’s revenues were flat at $1.4bn and $1.5bn in 2017 and 2018, per two buysiders.

Another potential snag on growth is the industry itself. Unlike comp Douglas, Wella’s primary market (hair) is itself a more mature market than others in beauty (skincare, perfume), meaning lower growth, three buysiders add.

Doc knots

Docs were a pain point for some buysiders, with the original margin ratchet of three step-downs drawing the most attention.

Elsewhere, EBITDA add-backs are capped at 25% EBITDA and over 24-months. These caps, however, can be circumvented with approval from a due diligence provider.  “And who wouldn’t provide a diligence report for KKR?” asked the third buysider.

Buysiders also complained that the basket for the dividend as part of this transaction, which sits in addition to the typical covenants for restricted payments, is not specific, leaving it available for use if Wella funds the dividend from the PIK. 

Buyside also highlights that there is also no leverage condition on the permitted investments basket, as well as “generous” flexibility for Wella to sell a division.

Tying it up

Guiding at E+375-400 bps and 99.75 OID, up from E+400-425 and 99.5 at launch, analysts compare Wella’s pricing favourably to other deals in the market, including Group of Butchers and Keter, when taking into account credit quality.

Some buysiders were surprised at the B2/B rating for the deal. “Their big competitors are IG and I do think it’s a harsh rating looking at the company’s size and debt levels,” said the fifth buysider.

Credit Suisse, KCM and JP Morgan act as bookrunners on the euro side of the deal. 

To receive our Legal QuickTake analysis please contact loans@9fin.com, attaching your copy of the draft Term Sheet / SFA so that we can validate you have access to the documentation.

Wella, JP Morgan and KKR declined to comment. Credit Suisse did not respond to a request for comment.