Out of the Blue
Analyzing PoolCorp's Acquisition of Porpoise Pool & Patio
Over the 12 years from 2009 through 2020, PoolCorp acquired 30 businesses for $213mm. In late 2021, PoolCorp purchased a single business, Porpoise Pool & Patio, for $789mm. My goals in this short write-up are to:
Survey Porpoise’s business. What did POOL buy?
Analyze POOL’s Acquisition. Was it a good idea? Did they pay a fair price?
Provide Context. How should the acquisition change POOL’s shareholders expectations?
What did POOL Buy?
In the quarterly conference call following the acquisition, PoolCorp’s CEO, Pete Aravan, described Porpoise as, (numbering mine)
…essentially 3 businesses. (1) One is a pool products distribution business that provides supplies to 262 individually owned and operated franchise pool and outdoor living retail stores and 3 company-owned stores. (2) The second part of this business is a world-class chemical packaging operation that packages and sells chemicals to these franchise stores and other distributors and retailers in the industry. (3) The third part of this business is a franchisor, Pinch A Penny, an award-winning, best-in-class franchisor with stellar reputation in the franchising world and in the swimming pool retail market
Porpoise’s three segments are each Florida-centric; 232 of Pinch A Penny’s 262 stores are located in Florida. The Company also operates a distribution center as well as a chemical packaging facility in Clearwater, Florida, north of St. Petersburg and West of Tampa
With a few clues, we can construct a credible guess at Porpoise’s 2022 income statement:
Franchise opportunity websites report Pinch A Penny (PAP) per store revenues at $1.773mm average
6% of revenues owed as royalties and 4% of revenues contributed to the marketing pool for a total of 10% of revenues to the franchisor
$50k fee for each new store, 10 projected in 2022
Commentary suggests the majority of supplies are purchased from Porpoise. I matched Leslie’s COGS of 70% and solved for the percentage that equals the revenue guidance POOL shared for Porpoise in 2022, 82%
POOL detailed Porpoise’s contribution to their 2022 revenue guidance
POOL suggested Porpoise operated with lower net margins, I guessed -300bps
Was it a Good Idea? Did They Pay a Fair Price?
Pool offered many reasons why purchasing Porpoise was a good idea:
Growth. POOL forecasts opening ~10 new PAP stores per year. Mature stores are worth ~$1.2mm in revenues and $120k in net income to POOL
Technology. Water chemistry systems and point-of-sale systems. Aravan explains,
…what I didn’t have was the software that allowed them to….professionally prescribe the recipe…So we now have that software…It will be offered to the independent stores too…we didn’t have a point-of-sale system…with the point-of-sale system, we’ll be able to say to that same store, ‘Would you like to run our point-of-sale software. And..it will eventually be linked with POOL360:”
Chemicals. Pool will max out Porpoise’s chemical packaging facility’s utilization rate, purchasing all excess supply while also lower cost through pooled purchasing
Supply Chain and Logistics. POOL’s existing distribution footprint can service PAP’s franchise base faster and cheaper than PAP’s single facility in Clearwater, FL
Talent. Jim Eisch, 28-year veteran of PAP, joins POOLCorp to oversee Porpoise’s business, reporting directly to POOL CEO Aravan
POOL’s $789mm purchase price is 24.7 times my estimate of Porpoise’s 2022 net income. Future revenue gains and cost synergies would lower the purchase price, naturally. Assuming PAP opens 10 stores per year which take 2 years to mature and that POOL can drive 200bps of margin lift, than the purchase price multiple could be 19-20x Porpoise’s 2024 net income.
POOL’s own stock has traded for a 20-30 times multiple of forward earnings over the last 10 years.
How Should the Acquisition Change POOL’s Shareholder Expectations?
Prior to POOL’s purchase of Porpoise, The Company was devoting about 15% of investments towards acquisition with the balance split equally between investments into working capital and capex. While small, the acquisition were regular with at least one per year since 2009, averaging $7.1mm per deal through 2020. During The Company’s 03/2021 Analyst Day, CEO Aravan described The Company’s M&A philosophy as,
…We remain strategic and disciplined buyers…there aren’t many businesses that transact that we don’t get to look at…(we) don’t need to buy anybody…because I’m in almost every market today. We also have the ability to do greenfield…it’s a question of capabilities. If there’s something unique about that business…
and in regards to Pinch A Penny specifically,
…there’s a lot of things that go on inside of that building and capabilities and knowledge that would have taken us years to go get. So that, in my mind, is a very strategic acquisition
Aravan’s quote are those of the scaled market leader of a business with a clear capital allocation framework and acquisition criteria.
At their 03/2021 Analyst Day, POOL shared revenue guidance, including ‘TBD’ from acquisitions. ‘TBD’ aligns with their recent history, spending $213mm on 30 acquisition in 12 years to then spend $789 on a single business out of the blue. I guess not too many businesses the size of Porpoise exist, but I believe Aravan when he claims POOL will get a look at most opportunities.
Would have hit that "Like" button if it weren't for the "Go Bills!" comment at the end. :)