AVCJ Awards 2021: Exit of the Year – Large Cap: Softex Indonesia

The key objective for CVC Capital Partners on backing Softex Indonesia in 2015 was finding six percentage points in gross margin improvement.

Over the course of 12 months, the business was scoured for potential operational efficiencies: energy and labour costs were reduced within manufacturing; equipment was upgraded and sourced from a single supplier to improve product quality and cut raw material usage; procurement processes were revised to leverage volume and deliver better terms.

Six points was the cost of penetrating the modern trade segment. Softex was already a domestic success story, holding its own against the might of Kimberly-Clark, Proctor & Gamble, and Unicharm.

It ranked in the top three across baby diapers, adult diapers, and sanitary napkins in a market enjoying robust macro tailwinds. Indonesia is both young and upwardly mobile. Families will keep producing children at a relatively rapid rate, while simultaneously climbing the product tiers from no diapers to cloth diapers to disposable diapers to economy diapers to premium diapers.

However, Softex was behind the curve on modern trade. Around 60% of the company’s business involved distributing to small-scale retailers, but the industry was gravitating towards large-scale hypermarkets.

For Softex to challenge Unicharm in this area, there needed to be changes in product, pricing, packaging and – a crucial component in modern trade – advertising and promotions (A&P). The company’s A&P expenditure was 9% of revenue versus 15% for Unicharm – a six-point gap.

“We knew we had to introduce new SKUs [stock keeping units] in modern trade, improve the trading terms, build strategic relationships, improve distribution management systems, and get real-time sales data. We also had to reorganize the sales team so that incentives were fully aligned with our growth strategies,” said Atiff Gill, a principal in CVC’s Asia operations team. “To do all those things, we had to drive some operational efficiencies.”

Unexpected outcome

This investment in growth meant that Softex’s EBITDA margin was generally flat, but the company’s overall market share – across all products, in general and modern trade – rose from 17% to 34%, a couple of points behind Unicharm. The modern trade initiative dovetailed with a move on the economy diaper segment. Softex studied Unicharm’s market-leading product, figured out how to offer the same or superior quality at a 10% lower price, and spent big on A&P.

The performance improvement prompted Kimberly-Clark to pay USD 1.2bn for 100% of the business, paving exits for CVC and Softex’s founder, the Leong family. The private equity firm has generated a money multiple of 3.3x and an IRR of 30% on its 40% stake.

The sale, concluded in September 2020, wasn’t expected. In its previous minority investment alongside the Leong family – in sportswear retailer MAP Aktif Adiperskasa – CVC exited via IPO. On suggesting a full sale several months ago, the GP was surprised to find the family receptive to running a quiet process to gauge interest. CVC couldn’t cultivate prospective buyers during a long lead-in or market the asset widely. As such, no groundwork was done prior to COVID-19.

“Trying to do an exit in the middle of COVID-19 was not easy or straightforward, especially for Kimberly-Clark. Just getting resources to diligence on the ground and get comfortable with all the different aspects of this business was challenging. Credit to them for mobilizing a lot of resources, including placing people in quarantine,” said Gill.

The process took about three months and involved inspecting Softex’s new USD 50m state-of-the-art manufacturing facility on the outskirts of Jakarta that will double capacity. CVC created a virtual reality walk-through, but given the significant capital expenditure, Kimberly-Clark wanted to dispatch people from headquarters with knowledge of factory operations.

It is the US multinational’s largest acquisition since 1995 and fills in a significant regional hole. While Kimberly-Clark had a strong presence across Asia, its penetration of the baby and adult diapers market in Indonesia was lacking.

“We were impressed by the level of interest despite COVID, and it goes back to scarcity. If you want to be in the diaper business in Indonesia and you miss out on this one, there is nothing left,” said Brian Hong, a managing partner and co-head of Southeast Asia at CVC. “People who have strategic, high-quality assets can take them to market and get very high prices.”

In addition to the push into modern trade and the construction of the new manufacturing facility, CVC helped Softex strengthen its corporate infrastructure across financial reporting, internal processes, and key performance indicators and incentives. Softex was run by a Leong family member who had built up the business from nothing, so he remained in place but was augmented by senior hires, including a chief commercial officer who previously worked for Kimberly-Clark in Asia.

Gill noted that Softex hit every annual incremental target set out in the five-year financial plan, even growing revenue and earnings in the first 12 months when the focus was on cost savings.

Show not tell

Another significant win came in environment, social and governance (ESG). The company went from doing nothing in this area to providing ESG training for staff, conducting materiality assessments, and setting up real-time reporting on metrics ranging from energy bills to societal trends. Planet Mark was brought in to assist with carbon footprint measurement and establishing targets for emissions reduction and now Softex is working with EcoVadis on sustainability benchmarking.

The company has won awards for the quality of its ESG reporting, but persuading management to put a program in place wasn’t easy. CVC made the pitch early on that diapers are a major contributor to pollution in Indonesia – they take 500 years to biodegrade in landfill and are often disposed of in rivers – and asked for USD 50,000 to fund a third-party study on what could be done about it. The CEO was receptive but said there were other more pressing priorities.

“We said CVC would fund it and start by looking at something simple, to demonstrate the value of ESG. We brought in Turnkey Consulting to do an energy audit and they found USD 250,000 of savings,” said Gill. “That was the trigger to convince the CEO that someone could come in from outside, tell him about opportunities, and they were credible.”

Pictured: Brian Hong of CVC (left) and Alvarez & Marsal's Oliver Stratton

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• Topics
• Southeast Asia
• Trade sale
• Consumer
• Indonesia
• CVC Capital Partners
• AVCJ Awards