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CVSL Is Embarking On An Ambitious Roll-Up Strategy

Feb. 20, 2014 9:09 AM ET | About: CVSL
Disclosure: I am long BTH. (More...)

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(Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)

Executive summary:

CVSL (OTCQX:CVSL) is a holding company led by John Rochon and embarking on a roll-up strategy for direct selling businesses.
Since 2012, CVSL has acquired seven direct selling enterprises, and is currently performing due diligence on a number of others in this sector.
CVSL recently applied for and was awarded an "uplisting" to the highest tier in the over-the-counter markets, OTCQX.
2014 is shaping up to be another transformative year for CVSL.
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There is clearly a lot of controversy in the multi level marketing industry these days. With Bill Ackman and Herbalife (HLF) continuing to spar, there is another interesting story developing in the direct selling industry at CVSL.

CVSL describes the direct selling industry euphemistically as "micro enterprise" which allows individuals to use their social connections to sell to friends, family members or customers derived from social media.

According to the World Federation of Direct Selling Organizations, the direct selling industry accounts for ~$153 billion in global annual sales (sourced from CVSL's February 18, 2014 conference call) and is comprised of 90 million direct sellers. That figure is staggering. Do investors really believe that one hedge fund manager will collapse the entire industry based on allegations of a pyramid scheme at one, Herbalife? My money here would be on John Rochon, CEO of CVSL and the chief architect of the Mary Kay management led buyout in the 1980's which turned out to be a wildly successful investment by all measures.

In addition to being an astute capital allocator, Mr. Rochon is also intimately familiar with the micro enterprise industry having led Mary Kay through a period of terrific growth, from $500 million to $3 billion in sales over a 16 year time frame, which included significant international expansion. My educated guess is that Mr. Rochon understands the laws and regulations pertaining to this industry better than some other, more high profile hedge fund manager currently embroiled in this sector (read: Mr. Ackman).

A Bit Of CVSL History

CVSL was acquired by Richmont Holdings, Mr. Rochon's private equity firm, in September 2012. I understand that Mr. Rochon's vision for CVSL is to create a holding company "for building a growing consumer cloud." The holding company structure is intended to allow owners of direct sellers to become part of a publicly traded vehicle and derive those benefits thereof, while maintaining their unique culture, sales organization compensation plans and leveraging CVSL's infrastructure from a back office perspective.

CVSL and its shareholders benefit from a diverse and wide array of product offerings. To that end, CVSL has acquired 7 businesses since the strategy was announced in late 2012, including:

The Longaberger Company; hand-made baskets.
Your Inspiration At Home; hand-crafted spices.
Agel Enterprises; nutritional gel supplements.
Tomboy Tools; hand-crafted tools designed for women.
Golden Girls; resale of jewelry and precious metals.
Paperly; custom stationery.
My Secret Kitchen; a line of food products.
The largest acquisition candidate included Blyth (BTH) which operates under two primary segments: (1) weight loss shakes and products via an 80% share of Visalus and (2) candles via its PartyLite business. Each operating business has global scale with Visalus officially announcing its expansion into Austria and Germany. While CVSL did own Blyth shares at one point, CVSL liquidated its stake and indicated the Blyth deal was not accepted by Blyth management.

On a February 18, 2014 conference call, CVSL management indicated that while CVSL investments are opportunistic in nature, the circumstances did not lend themselves to a consummated transaction given the reference shareholders, the Goergen family, own a significant stake in Blyth and did not approve of the CVSL offer.

While the Blyth deal appears dead for now, CVSL management did indicate that under the right circumstances that it would revisit the Blyth deal. In other words, the chances are slim to none, but I wouldn't count out deal altogether. Alternatively, CVSL indicated that the pipeline of potential deals remains robust. If 2014 is anything like 2013, there could be a flurry of deals as CVSL pursues its roll-up strategy and achieves scale.

For now, the business is clearly focused on growth and cash generation. CVSL has not been profitable to date, but it is operating like a start up business and I think a reasonable valuation methodology is based on sales which will have gone from under $1 million in sales in 2012 to an estimated $140 million sales run rate at the end of 2013 (considering the 7 businesses acquired).

Catalysts

I see two important catalysts on the horizon for CVSL.

First, CVSL engaged a boutique corporate finance firm to help it raise a $500 million "war chest" to fund more acquisitions. Mr. Rochon has proven himself to be a savvy capital allocator, so $500 million in new capital can help fund a number of acquisitions, meanwhile shielding current and prospective shareholders from dilution.

Second, CVSL applied for and was awarded an "uplisting" to the OTCQX which is reserved for businesses that have the most open and transparent financial filings among over-the-counter filers. This should provide CVSL more exposure to market participants and indicates that CVSL is moving towards becoming an SEC filer as it scales its business. Investors are encouraged to review the information on CVSL's website which includes timely and informative financial disclosures and press releases.

Risks

As one can imagine, a company listed on the pink sheets is associated with "penny stocks" and is outlined as a generaly risk factor in its 2012 10-K.To that end, CVSL will likely suffer at least some association by guilt while it is still listed over-the-counter. The recent uplisting to the OTCQX though should assuage investor fears regarding CVSL's reporting standards. The financials are audited by PMB Helin Donovan. Put differently, CVSL is a real business.

Turning now to regulatory issues, the companies underlying the CVSL umbrella are party to the "anti-pyramid" laws which require direct sellers to track of sales to end users. Because the businesses acquired by CVSL are much smaller than say an Herbalife, it is likely much easier for the operating businesses to delineate end user consumption. I expect that part of the IT infrastructure that is being put in place is designed to keep close tabs on the sales organizations and sales trends. The benefit here is that Mr. Rochon and his managers have considerable experience in this industry and are intimately familiar with the FTC regulations.

Finally, in terms of financial health, CVSL is in good shape. On a consolidated basis, CVSL had about $18 million in cash and marketable securities (likely the Blyth investment) as of September 30, 2013. We know that the Blyth investment was liquidated, so I suspect those marketable securities are now cash. Turning now to the liability side of the equation, CVSL listed $10.3 million in drawn credit facilities and $27.5 million in long-term debt. Subsequent to the last balance sheet snapshot, CVSL also sold certain non-core assets (a golf course owned by The Longaberger Company), further reducing its net debt balance. In my view, the balance sheet is healthy and ready for the $500 million cash infusion from a debt raise for the purposes of acquiring more direct sellers at rational prices.

While CVSL is not without its risks described above, the company has a competent management at the helm with significant "skin in the game" and the requisite experience to drive shareholder value. Readers, though, should recognize that these shares have been, and will likely continue to be, volatile.

Conclusion

The CVSL story is just beginning. And it is happening quickly.

Given the rapid transformation and the likelihood of a number of transactions in 2014, I hesitate to model out what this business might look like twelve months from now. Having said that, bestowing a terrific and proven capital allocator / manager with a $500 million "war chest" bodes well for equity holders.

In my view, CVSL shares will likely remain volatile as investors digest the growth story and all the moving parts. That said, at the current $220 million valuation, CVSL certainly doesn't look overvalued given CVSL's operating businesses delivered an estimated ~$140 million sales run rate by the end of 2013, pricing the business at ~1.5x sales.

While the Blyth deal appears to be dead after CVSL announced it liquidated its Blyth shares, I wouldn't be surprised if CVSL revisits the opportunity given the right circumstances. That said, CVSL appears to have a healthy deal pipeline from which to curate a hand selected set of subsidiaries.

2014 promises to be an eventful year for CVSL and its shareholders. Investors get a glimpse under the hood when CVSL reports full-year earnings next month.