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How Ron Sim won the Brookstone jewel

By Wong Wei Kong - 18 April 2005
The Business Times

(SINGAPORE) Ron Sim was already an admirer of American retail group Brookstone Inc 12 years ago. But it was only over a decade later that he made his first move.

And it led to an announcement late last Friday night that Osim International, Mr Sim's flagship company, would lead a consortium - including a unit of Singapore investment company Temasek Holdings - to mount a US$456 million acquisition of all of Nasdaq-listed Brookstone.

The transaction took 18 months to put together. 'I knew them 12 years ago. I've been watching them grow. For the last 10 years, their growth has been very consistent. One and a half years ago, I got Goldman Sachs to get us connected with them,' Mr Sim told BT.

The self-made entrepreneur obtained the backing of Temasek, an investor in Osim since 2000, and Temasek helped rope in US buyout specialist JW Childs Associates LP (JWC). 'It would have been difficult for Osim to have done it on its own. We are a small company. It was important to have Temasek's support,' he said.

In the end, Mr Sim got the deal he was looking for. 'I've spent a lot of time and effort on the deal,' he said. 'I think it is a very fair price.' The transaction will be funded by a combination of US$248 million in equity and US$205 million in debt plus cash on hand. For the equity portion, Osim will invest US$90 million for a 55 per cent stake while Temasek and JWC will contribute a total of US$150 million for a 40 per cent stake. Another US$8 million will come from the management of Brookstone, representing a 5 per cent stake. The proposed acquisition represents a major, ambitious leap for home-grown Osim, a healthcare and healthy life-style group best known for its massage chairs. Brookstone is a nationwide product developer and specialty retailer in the US with 288 outlets located in high traffic regional malls and airports. It sells innovative products ranging from massage chairs to outdoor tools, according to the US company's website.

It has a management team that collectively has 42 years experience of running Brookstone, and more importantly, has joined Osim in the buyout of the company. The deal comes at a time when US consumers - making up a huge homogenous market with about 100 million households - are paying more attention to a healthy life-style.

'It gives us immense access to the US market,' said Mr Sim. 'There is no massage culture in the US. We will bring our speciality products there.'

In the very short term, the deal is expected to give Osim's earnings a boost as early as the third quarter of this year. If the transaction is completed in July or August as planned, Osim said it will equity account 55 per cent of the results of Brookstone in Q3 2005. It said the deal is expected to be 'earnings accretive'. In FY2004, Brookstone's sales rose 14.9 per cent to US$499 million and it earned a record net profit of US$21.4 million or US$1.02 per diluted share. Brookstone has forecast earnings of between US$1.20 and US$1.25 per diluted share in FY2005. If the transaction had been completed in mid-2004, it would have boosted Osim's FY2004 earnings by 17-39 per cent, according to Osim. Osim will fund its investment in Brookstone with bank borrowings.

Mr Sim said the deal will also transform Osim from a pan-Asian group into a global player. 'This is part of our globalisation,' he said. Post-transaction, Osim-Brookstone will have a network of 991 outlets in 23 countries and over 100 cities in the world.

The bid for Brookstone comes hot on the heels of Osim's general offer for regional nutrition products distributor Global Active Holdings, which holds General Nutrition Centre (GNC) franchises in the Asian region. Osim is buying Global Active for its retail network of 143 outlets in Asia-Pacific, spanning markets like China, Singapore, Malaysia, Brunei, Guam and Saipan, as well as US military bases in Japan, Korea and Guam. The general offer ends later this month. The challenge for Osim now is to make these major acquisitions work. Global Active, in particular, has been rocked by successive profit warnings and management upheaval - which saw the suspension and reinstatement of its CEO.

Addressing concerns that Osim may be stretching itself too thin with major acquisitions in quick succession, Mr Sim said Osim, Global Active and Brookstone will have separate management teams. In the case of Global Active and Brookstone, key management will still be in place post-acquisition.

Still, the Brookstone acquisition will likely lead to another re-rating of Osim by the market. A blip in earnings expansion in the third quarter of last year had raised some concerns over whether Osim's growth was slowing.

Such concerns dissipated after Osim reported its full year 2004 results, which saw net profit for the year increased 32 per cent to a record $31.7 million.