The SPAC Daddy: Sir Martin Franklin

Martin Franklin is an interesting investor. He has a fantastic track record, including returns in Jarden, which has to be among the best performing investments of all time. I think he was probably a prime candidate for the next cut of the Outsiders (the one about capital allocation, not pony boy).

He also might be credited, at least partially, with popularizing the Special Acquisition Company (“SPAC”) structure. Basically, a SPAC is formed to acquire a business via a “blank check” and often will acquire private businesses, bringing them to the public markets via a sort of “reverse i.p.o.” This structure is hot right now with a lot of the S.V. set.

In my opinion, SPACs are usually not a great deal for investors because of the incentives paid to the promoters. They often have an incentive to get a deal done and they then recognize a big windfall. For example, a common structure results in the pormoters owning 20% of the post-SPAC enterprise (though the incentives may not be that much worse than a normal IPO, when you think about who is selling and why). Yet, the arrangement has worked pretty well for Franklin’s investors.

Franklin is an investor/bidness guy whom I’ve followed casually for some time. I found a couple of recent interviews of Franklin (he must be making the rounds for some reason…perhaps he’s planning to issue some paper into this apparent bout of fervor for SPACs?), so I thought I would put together a post pulling this info together.

Franklin’s Background

I really started to kind of pay more attention to what Franklin was doing after seeing the recounting of the performance at Jarden around the time of the sale of the company to Newell brands back in like 2016 (and subsequent falling out).

I also previously read the book Billionaire: The Life and Times of Sir James Goldsmith. Goldsmith was one of the “raiders” of the 1980s (given the name of this blog and my sort of persona, you can tell that I don’t really buy the pejorative connotation that some of the corporate management law firms were successful in cultivating back during this era). It has been a few years since I read this book, but I remember Goldsmith’s family was a relative of the Rothschild family.

Goldsmith built up several businesses. My recollection was that one of the keys to his success was decentralized management, laser focus on costs (Al “Chainsaw” Dunlap was the manager of some of his businesses that went well…perhaps a precursor to the zero based budgeting 3G stuff), hiring “good people”, incentivizing them well, and then getting out of their way. I remember that he built up a CPG business which was eventually sold to Unilever.

For purposes of this post, the book is really of interest in that Martin Franklin’s father Roland was a “merchant banker” who became associated with Goldsmith; eventually bringing him into participating in Goldsmith’s deals (usually taking an equity stake). I didn’t really understand a “partnership” between them, but they definitely worked together on a number of things.

For some additional detail, I actually wrote a post about the sort of Franklin-Goldsmith “legacy of crushing it” as well as the Jarden-Newell tie-up and the involvement of Icahn in a post a couple of years ago. See, Newell Brands and Uncle Carl.

Two Recent Interviews

Franklin recently appeared on the Bloomberg Masters in Business podcast with Bary Ritholtz. The appearance was to discuss “building businesses.”

Franklin started by recapping his history, starting with working for his dad. He and his eventual partner in other things, Ian Ashken, started out by overseeing the liquidation of some business assets for his father, Roland. He joked that he learned building businesses is a lot more fun and rewarding than liquidating them. Everyone can pull together as part of a team, including outside investors and employees.

Franklin and Ashken later acquired an optometry business (with an SBA loan) and combined that with a chain of optometry stores which they eventually sold to Essilor a big eyeglass lens manufacturer. If memory serves, he said they basically rationalized expenses, shrunk corporate bloat and achieved some scale. One interesting point was that he talked about Ashken and the value of having good partnerships and relationships with people that are sustainable and mutually beneficial.

Later on they acquired the Ball jar company (glass canning jars) business via a SPAC. This eventually became Jarden. They put up some “hilariously rich” (my term) level returns. They acquired a ton of other businesses/consumer products brands like tops trading cards, crock pot, and Mr. Coffee as Jarden grew. They eventually sold to Newell Rubbermaid. NWL subsequently went in the tank and Carl Icahn has been involved with it. I’ve got more detail about this stuff in my prior post.

One huge new piece of information (to me) was that Franklin said he started observing some decreasing relevance of the brands Jarden owned “with his son’s generation.” He said he thought the business would need to get greater scale and cost efficiency to meet the challenges he saw on the horizon so they sold to Newell Brands (the old Rubbermaid company).

I remember Franklin raised some objections to the Newell plans post merger when the stock/business was tanking. Given his statements in this interview, I inferred he was perhaps opposed to plans to sell some of the brands and “focus.” He seemed to think scale was critical to allow these weakening brands to manage through. The big takeaway for me was basically to obliterate NWL from my watch list.

Franklin also talked about his sort of overarching business philosophy which sounded very much like decentralization and proper incentives. He said he learned a lot from his dad and Jimmy Goldsmith. He really hammered on the negative impacts of large corporate bureaucracy and the problems that can creep in with any large organization.

Franklin implied that a focus on rational capital allocation is exceedingly rare in big business and can be a large competitive advantage. He really stressed the point that by investing “permanent capital” (much of which he can raise now given his track record) he is able to focus on building businesses for the long-term. According to Franklin, private equity is required to merely rent businesses as their funds are usually structured with finite lock-ups, after which the investors capital must be returned, often by selling the businesses owned by the fund. Some of this is probably marketing, but it also seems to make sense (“Honesty is the best policy.”).

Franklin talked with Ritholtz about SPACs and how he sort of popularized them (he’s got like four post-deal/public companies going right now). Going back to his early days in business, one thing to note is that he said he worked for Wilbur Ross early in his career at the Rothschild investment bank. Unless I’m mistaken, Ross was known to use a SPAC or two in his day.

Franklin talked about the SPAC that he used to acquire Burger King and is now the massive restaurant brands international (“QSI”). He got into some of the details of working with Bill Ackmann on that deal. He also talked about his opinion that Covid may have lasting impacts on certain businesses including quick service restaurants without a big digital and/or drive through business.

Franklin also talked a little about some other irons he has in the fire including a specialty chemicals SPAC that used to be called platform acquisitions and is now called element solutions, Inc. (“ESI”) (i think). I thought Ackmann was involved in that one too, but it didn’t come up during the interview.

Franklin also briefly mentioned Nomad foods (“$NOMD”). Nomad is a big package foods company in Europe that they have been building for a few years. Nomad owns the Bird’s eye frozen vegetables brand in Europe (my $CAG owns the brand in the U.S.) and igloo fish fingers and some other stuff. They also bought a frozen pizza business last year. They are not pushing a new “green cuisine” meatless brand. I have looked at Nomad before but haven’t done anything yet. One thing I’ve noticed about these SPAC deals is that they have “founder’s shares” or some other compensation arrangement, which give certain insiders a large cut of the upside.

My recollection is that Nomad has a deal where Franklin and co. get 20% of the upside above a certain hurdle. I didn’t really love the structure and just put it on a watch list for potential “outsiders” and moved on. [Too bad I didn’t write a blog post or I would have more detail.] They have executed well over the last couple of years and if the “Beyond meats” knock-off brand takes off, it could be another moonshot.

Here are the total returns since inception for Franklin’s newer SPACs Nomad, ESI (platform), APG (API group) and QSR (restaurant brands):

I didn’t pull the trigger on NOMD. I mean, it’s hard to overcome that compensation structure when you’ve got Buffett over here working for free and I think 3G has less onerous terms for passive investors in their vehicles.

Franklin on Berkshire After Buffett

Speaking of Buffett, obviously Franklin is sort of singing from some of the same pages with the permanent, rational, equity that can kind of “mind the store” and allocate capital with a view to the long-term returns (versus just growing revenues to justify a fleet of corporate jets or whatever). Interestingly, Ritholz asked Franklin about his prediction for BRK after Buffett and Munger. Franklin said he thought it would be likely to languish without them around to allocate the capital.

He said BRK without Buffett could turn out like Loews corp: Larry Tisch’s old vehicle that has not done well since his sons took over. It was a very interesting and provocative answer. I was shocked that he only did not dodge it but he went right at it! The answer does seem to give an insight to his view of the importance of having a rational, talented capital allocator at the top of large businesses.

I do think the BRK businesses are orders of magnitude better than the $L ones. C’mon, GEICO and the other BRK insurance businesses versus CNA!? Loews Hotels and BWP versus BNSF? But it is a possible outcome and an interesting take, from an absolute unit of a business manager/investor. So, definitely something to ponder in the possible range of outcomes.

API Group Interview

After finishing this interview, I started looking around on google podcasts to see if Franklin had done any other interviews. I discovered that Franklin also appeared on a company podcast for “API group” earlier this year. The podcast is called the “Building Great Leaders Podcast.” Here’s an embed of the episode:

Apparently, API Group is like a specialty construction and industrial services company that a Franklin SPAC called J2 (now API Group) acquired/brought public in 2019. I had never heard of it. This is like an internal company leaders podcast so the tenor of the questions was obviously different but it was pretty interesting as well.

By the by, API doesn’t look that interesting to me, but I didn’t spend much time on it. I saw they do some industrial specialty construction services and remembered Munger’s warning about the profits in those type businesses ending up in accumulating depreciation on equipment rusting in the yard (or something like that).

Franklin covered a lot of the same ground as he went over with Ritholtz, but he went into greater detail about trying to create win/win situations and the need to create sustainable relationships with employees, and all interested parties owing to his “permanent equity” outlook. Some of this might need to be framed in terms of the likely audience for consumption (probably employees in a company he now controls), but it wasn’t too different from the answers he gave Ritholtz. He also noted that he is always on guard when dealing with business people who have “chewed through” a bunch of relationships.

Franklin said he had a political science degree and really just tried to do things that would make common sense in a business from the perspective of a long-term owner. He again talked about running businesses for the long-term and focusing on costs, but also on limiting institutional imperatives and centralized bureaucracy.

Franklin told the story of one business he acquired where very detailed instructions were provided to him about where to park on the day of his first visit. He said everyone had assigned parking, largely in order of perceived importance and/or seniority. Franklin said he made a point of saying that there would be no more assigned parking other than the employee of the month and handicapped spaces. He indicated that assigning based on seniority would be anathema to him. He stated a strong preference for meritocratic cultures (of which he opined the U.S. would be a strong example).

One interesting side bar is that he has competed in a lot of ultra-distance races and other endurance sports (like Iron man competitions, etc…). He talked about how boring life would be without challenge and reward and how that fits into his business (and personal) philosophy. Franklin also talked about the deleterious effects inherited wealth can have on happiness and fulfillment (I understood that he got most of this life philosophy about the need for strain and attempts to achieve merit, in order to have fulfillment, from his father and maybe Goldsmith).

In Sum

Overall, I thought these two interviews with Martin Franklin, “the SPAC daddy” (and a very accomplished business builder/investor) were highly entertaining, timely, and informative. I don’t think he has done much media before. The concrete action items for me are: 1) NWL is coming off my watch list; and 2) maybe I will monitor NOMD a little more closely again. API and ESI don’t look interesting to me and I feel like I missed QSR.

If I had to sum up the interviews (and the whole categorization of Franklin) in a sentence or two, I might say that Franklin is “yet another example of the application of patient, rational, capital allocation, and business judgement to achieve astonishing success.”

It seems that Martin Franklin is continuing the traditions handed down from Roland Franklin and Jimmy Goldsmith through another generation. Some of these principles and systems seem to form common threads across the generations and business ventures of many different groups of associates.

It will be interesting to continue follow Franklin and co. to see if the success continues to be replicated. I would probably be more inclined to bet on Sir Martin continuing to do well in the long run than not (blasphemy against Berkshire, aside).

P.S.

After I published this post, Franklin did another podcast interview on The World According to Boyar podcast. Much of the same ground mentioned above is covered, but there were a few new little nuances.