AVCJ Awards 2022: Exit of the Year – Small Cap: CosmoLife

Advantage Partners canvassed a range of potential buyers in the exit process for Japanese spring water distributor CosmoLife. The company – which rents out water dispenser units and delivers replacement bottles – is recognised as the number-two player in its space locally. This naturally led to significant interest from fellow water companies, although they were eventually priced out.

Two pretenders with considerably more firepower came to the fore in the form of a global private equity firm trying to build out its North Asia presence and, perhaps counterintuitively, an electric utility.

Tokyo Electric Power (Tepco) is an active energy and technology investor, known to dabble in areas such as real estate. But where does mineral water fit in strategically?

“It’s similar in nature to Cosmo in that it is a utilisation company with a monthly fee,” said Tsutomu Hirakawa, a partner at Advantage Partners. “Water is fundamental infrastructure for individual customers, like Tepco’s electricity business. Water and electricity fees should be a good combination for them.”

Hirakawa led Advantage’s acquisition of the company from Orix Corporation in June 2019 for an undisclosed sum said to be equivalent to 5x EBITDA. At the time, Cosmo’s biggest competitor, Premium Water, was valued at 7x to 10x.

Orix had acquired Cosmo in 2015 via a private equity unit for JPY 20bn (then USD 166m). Investments were made to develop the business, but performance generally stagnated, and morale languished. EBITDA was flat for the following four years.

Advantage’s short holding period overlapped with the lockdowns and home isolation tendencies of COVID-19, which is believed to have driven uptake of in-home water dispensers and stoked appetite for impeccably clean mineral water. The sale to Tepco, finalised in January 2022, generated a 12x return for Advantage’s fifth Japan buyout fund, which closed on JPY 60bn in 2017.

“Tepco showed a plan to grow this company using its customer base, and it has a strong base in the Kanto region,” said Shinichiro Kita, a senior partner at Advantage, pointing to potential synergies around cross-selling and customer acquisition leveraging the power company’s ubiquitous infrastructure. “They can introduce Cosmo products to 20m.”

Satisfying a thirst

CosmoLife’s core business is in the supply of tower water dispensers for home installation and contracting subscription refills. The dispensers feature hot and cold taps and come in black, white, and wood-effect colours. These are squarely marketed at families. Several competitors are active in supplying offices; Cosmo considers its specialisation a point of differentiation.

Tap water in Japan is among the cleanest in the world but drinking water services in this vein are multiplying. This is in part attributed to public finicking about taste and greater awareness of plastic pollution. Indeed, Cosmo makes a feature of its environmental credentials, offering recycling services for its large refill bottles and flagging a commitment to the UN’s sustainable development goals (SDGs).

There is also the gadget factor and the idea that Japan has the highest density of vending machines globally (one for every 23 people). But for those with taste and freshness preferences, the convenience of not having to buy small bottles from the store seems to be a major driver.

These insights appear to have informed one of the company’s key value-creation initiatives. A water purifying dispenser that is loaded with tap water – in development for about a year before Advantage began its due diligence – was launched in the first year after acquisition.

The business line, called Humming Water, is based on similarly styled rental dispensers as the flagship offering. It is said to offset the need for up to 20 individual-serve water bottles per day. Monthly fees for Humming start at JPY 3,000 versus JPY 3,800 for CosmoLife.

“Younger generations like the concept of water purifiers because they’re a little bit cheaper than the monthly fee, and they’re eco-friendly. You don’t need a big bottle delivered to the house with the delivery costs and the miles of transportation to deposit,” Kita said.

“There was a risk of cannibalisation with the existing water bottle business, but we calculated those risks and decided we were selling totally different brands. If we could make those two product lines differently and sell them to different customers, we could avoid that risk at the minimum level.”

This was clearly well calculated. Humming scaled rapidly, coming to represent 20% of Cosmo’s overall business on exit. Indeed, the global private equity firm that lost out to Tepco in the sale process was said to have been particularly attracted to the upside potential of Humming.

Much of the growth can also be attributed to a digital revamp. Hirakawa said that after his first look at the marketing tools, circulation system, and customer database, he thought Advantage would have to hire outside resources to get the operation up to snuff. “There was a really big customer base, over 300,000 customers, but the company couldn’t utilize their data,” he said.

At the time of acquisition, customer acquisition was primarily through direct interactions at shopping malls and department stores. With the onset of the pandemic and rising home media consumption, the new online marketing campaign came into focus. The percentage of customers acquired via the internet doubled to around 60%.

Customer acquisition costs were quickly balanced by income, and by 2020, the strategy was already exceeding Advantage’s expectations in terms of revenue growth. By 2021, EBITDA was roughly double the projected levels in the investment plan. All the while, debt continued to decline ahead of schedule.

Constructive engagement

It’s worth noting that Advantage’s digital marketing plan was a tough sell with management. Hirakawa described it as a long conversation, with the private equity firm visiting the company on a weekly or twice-weekly basis for the first year of the investment. That conversation moved online with COVID-19, and on-site meetings were pared down to twice-monthly.

The rapport was amiable, however, with Hirakawa describing the team as open to collaboration and reinvigorated by the chance to redirect the company under new ownership. It reflects a general sense that the relationship was not optimal under Orix, with control of operations and strategy arguably too restrictive.

“The team’s attitude drastically changed. We talked to each other about a lot of initiatives in terms of lifetime value,” Hirakawa said, noting that a common language around performance criteria was established, activities were streamlined and financial performance improved.

“They were very reasonable and tended to come up with good ideas. Gradually the sentiment changed positively.”

Pictured: Richard Folsom of Advantage Partners at the AVCJ Awards

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• North Asia
• Trade sale
• Consumer
• Japan
• Advantage Partners
• AVCJ Awards