All-Clad has right ingredient for Waterford

One of the four recipes featured by one of the top US chefs, who uses All-Clad cookware, is Bailey's Chocolate Fondue. The main ingredient is, of course, Bailey's Irish Cream Liqueur. It is perhaps fitting, therefore, that an Irish group, Waterford Wedgwood, would want to include the All-Clad group among its expanding range of quality products. It will give it a fourth quality brand, on top of the well established Waterford's crystal, Wedgwood's china, and Rosenthal's porcelain. Moroever, it also represents an expansion into a new area. Waterford Wedgwood is, of course, in a number of diverse areas. These include Christmas decorations selling for $40 in the US under the Waterford label, table linen, writing instruments and tea (a big seller in Japan in Wedgwood tea rooms), but these are not material to the group. While All-Clad is not a large acquisition - sales will be boosted by only some 6 per cent - it is an important move but at a very high price. Nevertheless, if the group's projections for All-Clad prove to be correct, then it will prove to be a useful add-on.

It is an expensive acquisition. The acquisition price of $110 million is double last year's sales of $51.6 million, it is 11.3 times the operating profit and represents a hefty premium on the assets of $24 million. The goodwill will be a cool $80 million. This acquisition is in sharp contrast to the takeover of Rosenthal, the Germany porcelain manufacturer. Rosenthal was in a recovery mode and that was reflected in lower consideration paid. All-Clad has had a strong growth record, and the future looks bright; hence the high acquisition price. However, the acquisition will push the gearing into a heady 170 per cent. This is no longer viewed as an important ratio; the interest cover is more relevant and at 4.7 to 4.8 there is adequate cover. In addition, next year this could rise to a more comfortable 6 times.

The financial figures on All-Clad, supplied by Waterford Wedgwood, look impressive. Sales increased by more than three fold from $15.7 million in 1993 to $51.6 million in 1998. Pre-tax profit was more impressive, rising more than six fold from $1.5 million to $9.7 million.

No balance sheet has been published. The only figure supplied is for net debt and that shows a curious rise from $3.5 million to $37.1 million. That ten fold increase, against the background of increasing profitability is curious. It probably reflect the nature of All-Clad owners. US Equity Partners, L.P., the private equity affiliate of Wasserstein Perella & Co, has a controlling stake.

A significant minority is also owned by the management, including the chairman, Mr Sam Michaels, and other senior management. As a highly leveraged buyout, it appears that the equity holders took cash out of the group and replaced it with debt. Waterford Wedgwood, as part of the deal, will be taking over that debt which will be responsible for the high gearing. Waterford Wedgwood is very optimistic about All-Clad's future. So much so that it has predicted that turnover will double in two years while maintaining the high operating margins of 18 per cent. Obviously, the group's success to date reflects a big push by the management.

So how can this be sustained; with their shares sold the management will be less hungry? All Waterford Wedgwood said is that it "hopes to work closely with Mr Michaels and with senior management to build upon all-Clad's remarkable success by lending the group's full US and international support". The one potential weakness in the deal is that the management team has not kept some shares. These could have been subject to an earn-out. However, there is likely to be a non-competing clause in the share sale. Moreover, the group might consider giving that team adequate incentives, such as options over Waterford Wedgwood shares. There is certainly growth in the market. Figures supplied by Waterford Wedgwood show an average annual growth rate of 7 per cent in the more expensive cookware and kitchen accessories from 1990 to 1998, while the premium end (All-Clad's sector) grew by 18 per cent.

Virtually all of All-Chad's sales (97 per cent) are in the US through outlets such as Williams-Sonoma, Bloomingdale's, Macy's and Dayton Hudson. Its product range is used by some of the US's most successful chefs such as Martha Stewart and Allen Susser (Chef Allen's, Miami) Daniel Boulud (Restaurant Daniel) and Maria Helm (Plumjack Cafe).

Obviously there is plenty of scope for the range in other geographical markets through the group's international network. Indeed, if the deal is completed as scheduled on June 21st, Waterford Wedgwood intends to launch the All-Clad collect in Europe and Japan in 2000.