Victoria PLC, Balta, & Flooring Manufacturing

In Practise Weekly Analysis

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Founded in 1895 and listed in 1963, Victoria (VCP) is a manufacturer and distributor of carpets and ceramic tiles throughout Europe and the UK. The company was founded as a carpet manufacturer supplying mid to high-end residential properties and even the British Royal Family.

VCP’s performance as a public company was lackluster; in 1989, operating profit was ~£3m and still only ~£2m over two decades later.

In 2012, the direction of the company changed when the great-grandson of Victoria’s founder and Geoff Wilding, former banker and CEO of two prior roll-ups, plotted to overthrow the CEO and half the board.

There are many details and different stories of how Wilding took control of VCP. In short, Wilding’s consortium overthrew management and he was incentivised with a complex CFD that, upon returning roughly the market cap in dividends within 2 years, awarded him with ~50% of VCP’s shares outstanding.

Ten years later, Wilding is still Executive Chairman of VCP and owns 20% of the equity. His performance has been so impressive that VCP’s investor relations website updates automatically to calculate Wilding’s performance since taking over:

Source: Victoria Investor RelationsSource: Victoria Investor Relations

VCP’s performance plus the fact Berkshire owns Shaw Industries, one of the largest flooring manufacturers in the US, piqued our interest in the industry. We recently published our first interview on VCP with a Former Balta Director that has 50 years experience in the flooring industry and plan to cover Victoria going forward.

Wilding often quotes Buffett as if two like-minded capital allocators noticed the attractive attributes of the flooring business. The industry is resilient with 85% of revenue from renovations and only 15% from new construction. Although renovation spend is driven by house prices and consumer confidence, the relative size of the renovation market to new builds dampens cyclicality for manufacturers.

Source: H121 VCP Investor PresentationSource: H121 VCP Investor Presentation

Wilding may also operate in an even more attractive market than Buffett because of the fragmentation of retailers throughout Europe. In the US, Shaw and Mohawk compete heavily on price to supply a more concentrated customer base that includes big-box retailers like Home Depot and Lowe’s. These larger customers also offer their own private labels to end customers.

In Europe, VCP supplies thousands of small, independent retailers. Wilding believes that this will lead to structurally higher gross margins than US manufacturers in the long-run.

Source:  H121 VCP PresentationSource: H121 VCP Presentation

The underlying unit economics of a flooring company is likely what attracted both Buffett and Wilding. Manufacturers benefit from high returns on tangible capital due to stable negative working capital, relatively low maintenance capex, and low technological risk.

For example, in September 2015, Victoria paid £65m for Interfloor, the leading UK interlay manufacturer. Sleepy flooring manufacturers like Interlay earn high returns on tangible assets and equity but have stagnant organic growth. Since 2016, VCP has received ~75% of the £65m paid for Interlay which is reinvested into acquisitions to drive growth.

Source: In Practise, Interfloor, Companies HouseSource: In Practise, Interfloor, Companies House

Over the last decade, Victoria has made 20 acquisitions and has optimised its capital structure with a mix of debt and preferred equity. In October 2020, Koch Investments acquired 10% of VCP’s ordinary shares outstanding and made a £75m preferred equity investment (preferreds yield 9.35% and Koch also received warrants for up to 12m shares) to finance acquisitions.

A typical VCP acquisition looks like:

Source: H121 VCP Investor PresentationSource: H121 VCP Investor Presentation

VCP runs at 2-3x net leverage, 1 turn higher than its larger competitors, but with long duration and cov-lite features of the debt. Since VCP pulled its bond issuance in 2018, the credit market has warmed to the company and its current senior notes yield ~3.5%.

VCP is a fairly unique model relative to other serial acquirers we’ve studied such as Constellation Software, Addtech, Halma, or Lifco. In Scott’s Management graphic below (the write-ups on acquirers are well worth a read), VCP would fit into the “roll-up” bucket.

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