Santa Barbara, Calif.-based hair products manufacturer Olaplex Holdings (NASDAQ:OLPX) went public on Sept. 30 at $21 a share, raising $1.55 billion in capital. Since the initial public offering, OLPX stock has shot up 38%.
The IPO was unique in that all of the proceeds went to the selling shareholders, the Advent Group, rather than to the company.
This has led some, including my InvestorPlace colleague Mark Hake, to raise concerns that the failure to pay down some of its debt through the IPO suggests shares are overvalued.
Hake, points out that the company had $766.8 million in total debt as of June 30. Subtracting the $76.4 million in cash gives you a net debt of $690.4 million. On that debt, it paid $31.1 million in interest in the first six months of 2021. The interest expense in the first six months of 2021 increased by 65% over the same period last year.
Here’s how I view that entire situation.
A Closer Look at Olaplex’s Debt
First, the net debt is less than 4% of Olaplex’s current market capitalization of $18.8 billion. That’s a tiny sliver of its capitalization. Hardly worth getting your knickers in a knot.
Secondly, one must consider what the debt was used for. In this case, Advent International and other third-party investors were able to buy 100% of Olaplex LLC in January 2020 for $1.4 billion. The buyers put in $960 million of their own cash plus cash from a $450 million term loan and $50 million from a revolving credit facility.
Of the purchase price, 69% was allocated to the brand name, by far the company’s biggest intangible asset. Founded in 2014, Olaplex’s hair care products are a cut above most brands you see on your local drug store’s shelves.
“Olaplex has differentiated itself by offering superior products backed by patents,” said Advent’s Tricia Glynn. “It is rare that we see brands of this size growing so rapidly and with such a passionate consumer base.”
So, Advent added $500 million in debt to get back a company with $282.3 million in sales and an operating profit of $86.1 million. Its interest expense of $38.6 million represented around 45% of its operating profit. However, sales in 2020 grew by almost 90.5% over 2019.
Therefore, if it maintains the same growth and operating margin in 2021, sales would be $537.8 million, its operating profit would be $164 million ($537.8 million multiplied by 30.5% operating margin), and net interest would be $62.1 million (double the interest from the first half of 2021). That’s 38% of its operating profit for a 700-basis-point reduction.
A Stroke of Genius
My colleague also pointed out that, in December 2020, the company paid out $470 million in cash dividends to Advent and third-party investors such as Mousse Partners, the family office behind Chanel, and the secretive Wertheimer family.
So, in addition to the $450 million term loan, it added a $350 million term loan in December 2020, for a total of $800 million.
Usually, I’d have a problem with this kind of payout, but given how little leverage it has, it’s water under the bridge. Advent and its partners took a risk, and it appears to have paid off famously. Good for them.
If we assume that 40% of the purchase price was in cash, that’s $552 million that Advent and partners came up with in January 2020. That means it used another $408 million in loans secured for the equity portion of the acquisition. The remainder was from term loans acquired by the company that I’ve described above.
So, with the $470 million in dividends, it paid down the $408 million in debt plus $62 million of the cash used to buy Olaplex. Advent sold 79 million shares in the IPO for $1.55 billion in net proceeds.
A back-of-the-napkin calculation suggests that Advent’s $491 million investment in Olaplex [$552 million cash multiplied by 89% ownership] has so far realized $418 million in cash from dividends plus $1.55 billion for shares sold in the IPO.
That’s a 300% return in less than 24 months with another 499.5 million shares left to sell. At current prices, that’s another $14.5 billion to come.
Whoever pulled off this deal at Advent ought to be the managing partner or CEO. It was a stroke of genius.
The Bottom Line on OLPX Stock
As for OLPX stock, buying in the $20s won’t be a mistake for long-term investors.
I think Olaplex’s business has just scratched the surface. I wouldn’t be surprised if Mousse Partners hung on to their shares for the long haul. The opportunity is that good.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
