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Kathmandu to buy Rip Curl for $368m to create billion dollar retailer

Tuesday 1st October 2019

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Kathmandu Holdings will pay about $368 million to buy surf brand Rip Curl to create a billion-dollar revenue retailer, which it says will add at least 10 percent to earnings per share. 

The outdoor equipment chain has entered a binding agreement to buy the 50-year-old Australian company, which generated a profit of $27.2 million on revenue of $477.4 million in the June 2019 year.

Kathmandu will raise $145 million in a one-for-four pro rata accelerated entitlement offer to help pay for the acquisition, selling shares at $2.55 apiece. That's a 16 percent discount to the yesterday's closing price at $3.05, which aren't carrying rights to next week's dividend payment. It will issue $32 million of stock to Rip Curl's chief executive and founders and take on $231 million of new debt to fund the balance. 

"The acquisition of Rip Curl transforms Kathmandu into a $1 billion outdoor and action sports company, anchored by two iconic global Australasian brands," Kathmandu chief executive Xavier Simonet said in a statement.

"The combination of Kathmandu, Oboz and Rip Curl achieves diversification in product, channel, geography and seasonality, and creates a platform for the acceleration of our brands’ global expansion into new channels and markets."

Trading in the shares was halted for an institutional bookbuild. Jarden Securities and Credit Suisse Australia are joint lead managers and book-runners of the entitlement offer, which is underwritten by Jarden Partners, Credit Suisse and Deutsche Craigs. 

The acquisition needs shareholder approval at a special meeting to be held in Sydney on Oct. 18. All Kathmandu directors intend to vote in favour of the resolution. 

Last month, Kathmandu shares were trading at an 11-month high after the retailer reported earnings at the top end of guidance. 

Kathmandu said the combined entity, after adjusting for the deal, would have generated a profit of $81.1 million in the 2019 year on revenue of $1.02 billion. Earnings before interest and tax of $123.2 million would have been at a margin of 12 percent. The group's net debt would be $228.8 million at a gearing ratio 27.4 percent. 

The listed retailer expects the Rip Curl acquisition will help lift per share earnings by at least 10 percent in the 2020 financial year before any duplicated costs can be stripped out. That implies the company will deliver earnings per share of at least 28.05 cents near year. 

Rip Curl is owned by 22 shareholders, including three who are associated with the founders, who control 85 percent of the stock and have committed to not competing with the new entity for five years. 

If the deal falls through because any of Kathmandu's directors don't recommend the acquisition or if the underwriters or lenders pull their support, Kathmandu will owe a A$2 million break fee to Rip Curl. 

Kathmandu played down the risk of failing to integrate the businesses, saying both brands will retain their individual branding and cultural values, with the respective businesses run as separate entities under the group umbrella. 


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