The market value of RHM soared as investors re-evaluated its business, and GFW eventually withdrew its bid. Thus was born the brand-valuation consulting industry.
A Brand Bond
Later, in 1992, RHM was bought by UK conglomerate Tomkins, it came off the stockmarket and Tomkins wrote off all RHM’s intangible assets. Brand valuation no longer had a use at the firm. Fast-forward to 2000. Tomkins agreed to sell RHM to Doughty Hanson, a private equity fund, for £1.1 billion in a highly leveraged deal. It was then that brand valuation was ready for a comeback.
“One of the first things I had to do was work on a refinancing of the group,” recalls Schurch, who moved after the Doughty Hanson deal from his post as managing director of the food unit at Tomkins to become RHM’s CFO. “During that work, we had to identify what were the underlying assets that would support the business—what assets could lenders come and take over for security.” The firm was carrying assets on the balance sheet at the time totalling just £300m. “If you are offering that as security, you are not going to get £650m financing” (the amount required by Doughty Hanson to pay off a bank loan that it had taken out to acquire RHM).
So Schurch and his bankers decided to structure a financing package in such a way that they put all of the brands into separate intellectual property companies, effectively licensing the brands back to the RHM operating divisions. The result was a unique bond issue in 2001—dubbed the “Brand Bond”—which securitised five of the company’s oldest brands, those with the most reliable cash flow, including its Hovis bread and Bisto gravy. It was structured in tranches of investment-grade and junk bonds, for a total of £650m, the largest-ever sterling corporate bond issue at the time. The bonds leveraged the earnings of the brands—running at an annual Ebitda of £150m—by a factor of more than 4.3. The £650m paid off the bank loan, and annual financing costs dropped to £80m from £93m.
An essential part of the bond financing was another brand-valuation exercise, for which Interbrand was brought back in. But unlike the seminal effort in 1988, the brand valuation this time round would not be a one-off exercise. It would become an important part of the com-pany’s day-to-day management.
“Having paid Interbrand nearly half-a-million pounds for their work, my aim was to make sure we really exploited that and built upon that work,” says Schurch. “It gave me a tool to say to marketing, ‘You are charged with protecting the value of these prize assets, the brands. You need to demonstrate year on year that you are protecting and growing them.’”
Schurch and Ginny Knox, the joint chief operating officer of consumer brands, set up a review process for the company’s 20 brands based on seven metrics that were used in Interbrand’s valuation. They comprise statistical measurement of: 1) how the overall market segment has changed; 2) the brand’s stability; 3) market share and other “leadership” qualities; 4) long-term trends for the brand; 5) advertising spending, sales promotions and related activities to “support” the brand; 6) geographical distribution; and 7) trademarks and other legal protection.