Consumers are as health conscious as ever. From lifestyle to nutrition, spending in health and wellness continues to surge as more and more people are adopting more and more of these trends into their daily lives. Yet, one challenge that consumers face is that the market is incredibly fragmented, making it hard to discern quality brands from less reputable one. This competitive landscape has also suppressed the valuation of a lot of these brands. But this dynamic also creates opportunities for Relevium Technologies (RLV:CA), which wants to capitalize on this by consolidating proven brands under its wholly-owned subsidiary Relevium E-Health. The company announced its first major acquisition in BioGanix recently.
Equities.com caught up with CEO Aurelio Useche to learn more about the company’s roll-up strategy and why the market is primed for this approach to growth.
EQ: You were appointed CEO of Relevium in October. During this time, the company has made a very noticeable shift toward seizing the health and wellness space through ecommerce. What’s the market opportunity that you see in front of you?
Useche: It’s a huge market. The health and wellness market is a $300 billion business, and only 7% of that business is currently done online. We’ve seen the shift online happen in a lot of other businesses, and it’s just starting for health wellness. For example, one area that has thrived is electronics and home furnishings, which has gone from about only 7% of business done online to about 30% very quickly. So, it’s a huge opportunity for Relevium.
Right now, we have an immediate pipeline of over $100 million of business and $30 million in EBITDA of brands that we can acquire, and most of the potential transactions are in the space of either nutraceutical or fitness nutrition. We do have others in the cosmeceutical business. We believe that over the next several years, we can build out to significantly higher revenues this way.
EQ: The online health and wellness industry is still very fragmented today. Relevium is looking to execute on its roll-up strategy, utilizing a portfolio construction approach through acquisitions to capitalize on this and accelerate your growth. What are the advantages to this model versus organic growth?
Useche: Our strategy does have an organic growth component to it, but we felt that there are so many opportunities today to build a portfolio of brands, which would accelerate our growth goals. As such we decided to go the acquisition route. The past six months, we’ve been looking at different companies and building out our pipeline. We have been getting to know these brands, their owners and their market place quite well. We want to makes sure we build a high level of trust with all our targets so “selling our vision” has become very important in our negotiations. The other part is that we’re trying to build a portfolio of brands. There is a tremendous cost in launching a brand from scratch that we would essentially bypass through just acquiring the company. We want to acquire brands that we feel are a good representation of the markets that we’re looking in.
So, that’s why we decided to go with the roll-up strategy. Once we have achieved a certain number of these brands in Relevium and have had the opportunity to optimize them operationally and strategically, then we focus on growing those markets and creating brand equity organically.
EQ: BioGanix was the first major acquisition through this strategy. What was it about BioGanix that made it your top target?
Useche: With BioGanix, when we look at a brand or we look at a company the first thing that we look at is, of course, the product they’re offering to the market. We look at their presence in the platform that they’re on, whether it is Amazon, their own platform, or whatever. We look at how the company is received by consumers and how its rated by customers. We look at the brand and we make sure that the brand represents something that we want to represent. Also, given that we are a microcap, we felt that BioGanix was the right sized transaction for us. So, I think it was a combination of all those factors.
EQ: You mentioned Relevium’s deep pipeline earlier, and provide some insights into the BioGanix acquisition. What are the criteria you look for in your acquisition targets?
Useche: In terms of the deal size, we look at companies between $2 million to $20 million in revenues. They have to have significant growth year-over-year and be profitable. We look at companies that are operating strictly with an online presence, and then we want to make sure that management has some sort of “special sauce”, if you will, with how they operate and why they’ve been successful in their business. Of course, a major reason for choosing a company has to do with valuation. So, we’ve settled on a valuation target right now, on average, of 4 times EBITDA. We won’t go higher than 5 times, that’s for sure. There are many reasons for this valuation. Being that the brands are online brands, all of the processes of the company—from manufacturing, order processing to logistics and delivery to the customer—the entire delivery chain is done by a third party. So, that forms part of our initial assessment on how we look at these companies.
EQ: What do you feel is the key to a successful roll-up strategy?
Useche: Roll-up strategies either do well or they fail, and we obviously want to be in the “do well” category. There are many things that are very important to make sure that our roll-up strategy works well. Leverage; the right amount of leverage is important. Also, the capital structure is important. The company’s ability to absorb the new company and to properly operate it afterwards. So, we’re going to spend a lot of time to make sure that we integrate every company and that we’re successful at doing so from the start.
Now, are there going to be issues along the way? I’m sure. Chances are there are going to be challenges, especially as we’re dealing with larger targets. You’re always going to find things that may not be working well and so on and so forth. So, it will be up to us and our team to make sure that we are on top of running our business. It’s going to be very important that we work in a well-synchronized and efficient manner. So, the quality of the team in place plays a big key in us doing well in this roll out.
EQ: How does your strategy allow you to mitigate risk?
Useche: There are a lot of brands out there in the market for nutraceuticals and nutritional supplements. There are a lot of over-the-counter brands being sold through health and wellness store. Of course, there is the online part of it. So, we picked e-retail because we feel that this will give us more control over the risk factors associated with launching brands in the market or managing brands.
For a brick-and-mortar nutraceutical brand, for example, it may take them a long time to hit the market and be recognized. They have to buy shelf space, manage categories and merchandising presence in retail stores. It really is a huge investment. By being purely e-retail, while there is risk, the initial risk and investment to develop the market is not there. So, we basically leverage ecommerce and e-marketing. We leverage an ability to drive clicks within the space of health and wellness. So, it is a more controllable aspect and less risky aspect of running the business than distributing through pharmacies and health. So, that’s our view as to how we manage risk and why we picked this strategy going forward.
EQ: How do you ensure that the target companies and their teams stay engaged and invested in growing their brand post-acquisition?
Useche: Typically, we would like to structure our deals in a way that the sellers have some ability to partially cash in on their success to date, but we’d like to leave about 40% of the purchase price on the backend. One reason, obviously, is to make sure that we cover all the unexpected things that can arise after the acquisition. But also, we use it as a tool to provide them with some upside so that they remain engaged in the success of the company. Now, it doesn’t mean that we’ll keep the team of every single company that we acquire. With BioGanix, the owner is going be an advisor to the Board for a period of six months.
But as we look forward and down the pipeline, we see companies where the success of their brand is very much associated with what the particular sellers did in terms of marketing the brand. So, in that case, we want to keep that talent in our business for some time. So, we’ll want to provide them with considerable upside opportunities. That’s an important part of our plan.
EQ: Do you have a target number of acquisitions you want to make in a given timeframe?
Useche: In an ideal World, we would love to do most of the transactions in our pipeline this year, but that’s not realistic. Between now and 2019, our plan is to roll-up an estimated revenue base of about $72 million, right up to Q4 of 2019. That’s roughly about $20-something million in EBITDA. That’s aggressive, but from our internal perspective, it’s not aggressive enough. But we feel that the first year or two especially are very important in making sure that our formula, and our engine for acquiring and adopting these companies is perfected. It’s going to be modified and adjusted as needed, because we’re going to be learning a lot in the first year or two. So, we’re being conservative in the approach. If we can speed it up, we will.
EQ: In terms of capitalization, how are you financing the growth strategy?
Useche: One thing that we’re looking at is that all the companies that we’re acquiring are profitable. They produce between 25-30% EBITDA. There is some amount of debt funding that we can rely on for the transactions. Right now, our model calls for 2 times EBITDA in terms of debt, but we know that we can go up to 3 times on these transactions. The balance will be raised through equity from private placements and broker-dealers.
In the particular raise we’re currently doing, the total amount to be raised is up to $7.5 million, $3.7 million of which is in equity. We hope to do the balance of it all in debt. For this transaction, we’re being conservative not to take on too much debt. The initial debt is going to be probably more expensive than what we can get in subsequent transactions. So, this one will be more balanced, but as we’re able to get better terms of debt going forward, we might get a little bit more aggressive.
EQ: In regards to Relevium Wellness, which is your bricks-and-mortars business, can you tell us about the company’s approach here and the market opportunity that you are going after?
Useche: We think that there is a tremendous opportunity in terms of wellness clinics as a roll up strategy, and that it could complement our E-Health strategy by having an exclusive brick-and-mortar retail aspect to the business. But this is currently taking a bit of a backstage role at the moment because we really want to execute on the ecommerce potion of our business. That’s going to be the quickest path to growth for the company and the quickest way to provide shareholders with real value. But from the perspective of long-term value, we think that the goal of the health and wellness clinics will be quite complementary. So, it is very much in our scope and we talk about it all the time, but we decided to put it on the backburner until we’re ready to really go out and execute without disturbing our main business.
EQ: What are some key metrics and milestones to watch going forward to gauge the company’s success?
Useche: I would say the top line for us as we’re adding new companies. It’s important but one thing that I think is also important for investors to pay attention to is the formula for delivering value. So, we’re buying companies at an average of 4 times EBITDA, and we are using a model that gives us an average of about 6-7 times recognition by the market as the company progresses and does well. In fact, if I look at the pro forma statements for 2019, we’re projecting just north of 6 times EBITDA valuation for the company. So, we believe the actual valuation that we can get, if we do a good job and we really understand both the performance of the company and the ability to reach investors and the marketplace, we should in theory be able to seek a higher multiple. I think that market valuation is going to be an important part of the value creation.
EQ: Do you have any final takeaways that you want to leave with our readers?
Useche: Relevium has the potential to be a unique proposition as a Venture Exchange company. I hope that potential investors follow the story and that hopefully we will be able to provide them with positive surprises along the way.
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