Saturday, December 23, 2006

Financial Times Editorial - Wishing it could be Christmas every day?

Financial Times Editorial - Wishing it could be Christmas every day?
Copyright The Financial Times Limited 2006
Published: December 23 2006 02:00 | Last updated: December 23 2006 02:00

An unusual - perhaps unique - investment opportunity has arisen that is ideally suited for private equity investment. The target company owns an exclusive franchise, several valuable brands, its own production facilities and a carbon-free distribution network. There are also attractive opportunities for consolidation in its industry: the festive gift-giving business.

The company in question has been in business for more than 1,600 years, having been founded by Saint Nicholas, Bishop of Smyrna in Turkey. His first transaction was to deliver bags of gold down the chimney of a poor man, to provide his three daughters with dowries. Today the company is based in Lapland, Greenland and the North Pole at custom-built manufacturing sites where a dedicated workforce of elves produces gifts for hundreds of millions of children on all six continents.
Distribution now takes place on three dates: December 6 (St Nicholas's day), December 25 (Christmas day in western Christian churches) and January 7 (the eastern Orthodox Christmas day). Orders are received in the weeks preceding the appropriate festival by post, telephone, e-mail and - the oldest method - letters sent up chimneys. Gifts are delivered on sleighs drawn by reindeer, which makes no contribution to greenhouse gases.

The company is loss-making, since no way has been found to monetise its output (apart from the odd mince pie and glass of port left out for Santa's little helpers). Production costs are high, because it manufactures the gifts in high-cost locations and its facilities are underused - expensive equipment and a highly skilled workforce are idle for much of the year. It has also failed to exploit its intellectual property, charging no royalties for the use of trade marks such as Father Christmas, Santa Claus and Grandfather Frost.

Under new management, all this could change. First, the company should end production altogether, and transform itself into a pure retailer. It could then source all its gifts from low-cost countries such as China.

Second, it should move online and adopt a similar business model to Google. Customers would be required to order on the company's website, where they could search for the latest gifts - generating fees every time a paid-for search result was clicked. The company could also provide after-sales service on premium telephone numbers from a call centre in India

Third, the company should manage its trademarks properly. Retailers should pay royalties for running "Santa's grottoes", as should companies using Father Christmas to market products and the writers of songs such as "Santa Claus is Coming to Town". Strict measures should be taken against those who damage the brands - including the makers of films such asISaw Mommy Kissing Santa Claus.

Finally, there is considerable scope to acquire similar businesses associated with other religious festivals such as Hannukah, Diwali, Eid-al-Fitr and Chinese new year. Substantial economies of scale should be achieved, since the different festivals are spread throughout the year.

The attached business plan shows that at current low interest rates, the acquisition could be largely debt-financed - generating substantial returns for the equity investors. The offer closes in 12 days, and early expressions of interest would be appreciated. The commanding market position of the existing owners shows that this is a winner-takes-all business.


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