Constellation Software: Altera, SHEIN, Dino Polska, DHR, Alteryx, TDG

Content Published Last Week

1. Constellation Software: Altera Analysis

2. Constellation Software, Allscripts History & Post-Acquisition Strategy

3. On-Demand Fast Fashion Supply Chain in Turkey

4. Dino Polska & the Polish Grocery Market

5. TransDigm: Esterline & Korry Electronics Case Study

6. Danaher Business System: Hach Sales Team Case Study

7. Alteryx: Enterprise Customer Perspective

Constellation Software: Altera Analysis

On May 2nd 2022, CSI made its largest acquisition ever, acquiring Allscripts’ Hospital EHR business for $725m. The transaction was financed with ~50/50 debt and equity, making Allscripts the second LBO conducted internally at CSI after Acceo in 2018.

As we’ve previously discussed, increased competition and the law of large numbers is pushing CSI into acquiring larger assets. In 2023 YTD, CSI has deployed a record $1.9bn into acquisitions, with $1.4bn into assets with an enterprise value over ~$200m. This includes Orbis Blue for $700m, Wide Orbit for $500m, and ~$200m for Empower.

We’ve spent 6+ hours interviewing Former Allscripts and Altera executives to understand drivers of Altera’s Y1 performance and the long-run opportunity in larger acquisitions. We also published one interview with a Former Allscripts / Altera senior executive.

In its first year of ownership, CSI has generated $104m in FCF at Altera, a Y1 ROE of 26.5%. However, our primary research suggests there are two fundamental reasons why Altera’s 10-year IRR may hit the lower-end of forecasts:

1. Higher than expected customer churn

2. CSI’s operational playbook less effective than usual

This analysis shares our learnings and explores Altera’s challenges in more detail.

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SHEIN & On-Demand Fast Fashion Supply Chains

A current internal research project is to understand SHIEN’s supply chain. This slide from Ben Evans shows SHIEN's rapid sales growth:

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The online fast fashion player reportedly offers 5-10k new SKUs per day compared to ~25k for Zara per year. It also reduces fashion risk by committing to less inventory upfront and replenishing on more quicker, accurate forecasted sales data. SHEIN’s systems seem to also be deeply integrated with the manufacturing ERPs of its suppliers. Multiple factors lead to quicker time-to-market, with less fashion risk, and lower COGS.

This is the first interview in a series to understand SHEIN’s operation in more detail. We interviewed a Former Li & Fung and SHEIN manager to understand the on-demand fashion supply chain in Turkey.

Almost all garments are produced in Turkey. However, due to the cost of workmanship in previous years, our prices were higher compared to China. If a product requires more workmanship, the price difference between China and Turkey widens. We are not as competitive in outerwear price-wise, and this also applies to special items like quilted pants. Egypt, for example, is better at producing these items. Fabric prices for these garments are quite high here, but Egypt is more cost-effective. However, there have been changes recently due to fluctuating exchange rates. Until recently, China had better prices, but the gap has closed due to the increase in currency. We can now offer better prices for workmanship. The biggest cost components of a garment are fabric and workmanship. If our workmanship price is close to China's, and we use Chinese fabric, we can easily offer a better price. In Turkey, one certificate is being issued, which could be of interest. Suppliers who have this are not required to pay taxes. This is becoming a common practice. - Former Li & Fung & SHEIN Manager, Turkey

SHEIN’s supply chain sources from China and Turkish / MENA suppliers.

Traditional retailers typically purchase products based on comparisons with previous purchases. For instance, they might compare the quantity and price of items they bought in a similar category, color, or shape in the last season. They then plan their purchases for the current year based on these comparisons, buying the full quantity they intend to sell. However, online retailers operate differently. They start with a small quantity for testing purposes. If a style sells well, they reorder. If it doesn't, they avoid ordering large quantities, thereby saving money. The main difference lies in the sampling and production side. - Former Li & Fung & SHEIN Manager, Turkey

Dino Polska & Polish Grocery

Dino Polska is a $10bn Polish-listed discount grocer. The company is run by its founder and has been growing FCF at 20%+ for over a decade.

This interview with an executive of 25+ years experience in Polish grocery, mainly working at Dino competitors, explores the market dynamics and Dino’s positioning vs Biedronka. One insight is that the market is evolving from a price-first market to a convenience-first one.

The price is not the key factor in Poland now. Yes, it is important. I'm not going to tell you that people don't pay attention to prices, but the first consideration is the distance needed to travel to the store, followed by the range of products you can buy in the store - the SKUs - then the quality, and finally, the price. - Former CEO of Dino Competitor

Biedronka’s offering seems less focused than competitors:

For several years, they (Biedronka) have struggled to adapt to rural areas. They want to focus on mass production because they believe it will increase their EBITDA, and they are reluctant to make changes. Their strategy is to offer the same products in every store. They cannot provide a proper assortment. If you consider Lidl in Poland, they have won the non-food hard market. They have a great selection of non-food items, clearly divided into textiles and other non-food items. But the quality and range of their products are excellent. If you're looking for DIY items, they have a full range. Biedronka does not offer this. Their selection is random. Sometimes they have T-shirts, and sometimes they have shoes, but even if they have shoes, they might not have the right size. They do not pay enough attention to this part of their assortment. - Former CEO of Dino Competitor

TransDigm: Esterline Case Study

Another internal research project is to understand TDG’s post-acquisition operational strategy. We’re using the Esterline deal as a case study. This interview is with a Former VP of Korry Electronics, a prior opco of Esterline, to understand how TDG changed the business post-acq.

I recall when TransDigm took over, there was a lot of talk about in other companies about economies of scale and leveraging the enterprise, among other buzzwords. However, these were almost considered taboo at TransDigm. While these concepts can work, they often come with bureaucratic bloat. TransDigm's focus is clear; price profitability and price productivity and profitable new sales. None of the other stuff plays. If you can’t show either hard savings in terms of real dollars or new business, it’s not real. - Former VP at Korry Electronics

We also discuss how TDG repriced contracts, challenges with customers, how volume changed during COVID, and differences in culture vs other aero OEM’s.

Danaher Business System

Another internal research project is to understand how DHR implements DBS at life sciences companies relative to industrial businesses. DHR is set to become entirely a life sciences company with more intangible than tangible assets. The way DBS is implemented to drive margin improvement is evolving in manufacturing, sales, and R&D. This interview explores how DBS is implemented across sales teams in Danaher:

Many people were shocked when Danaher acquired Beckman Coulter. That was their first major multibillion acquisition, and everyone thought they overpaid. Beckman Coulter was poorly managed at the time. I've worked with many people who were at Beckman post-transition, and there are many stories. But ultimately, they became a strong DBS culture and successful business. I believe we live in an era where, yes, they're going to invest strategically, but DBS will also be part of the journey and that will improve some of the questionable valuations. They'll extract more value from the company. - Former VP at DHR

Alteryx: Customer Perspective

Alteryx faces challenges scaling its platform for large enterprise customers. A current Alteryx customers discusses the challenges with the product:

From an enterprise perspective, if you've got 30 or 40 people and two or three teams, it's manageable. But when you have hundreds of developers and 100 or more teams, it becomes an administrative nightmare because you have all these other tasks you need to be doing. That's their weakness from an enterprise perspective. - Alteryx Customer

Alteryx's lack of enterprise permissioning and scalability could be a limitation to growth in enterprise. The full interview covers Alteryx's product, competition, and strategy.