Kathmandu's Kirk says rejection of Briscoe offer mainly about price, questions Duke's skill set

Thursday 6th August 2015

Kathmandu chairman David Kirk says a takeover offer from Rod Duke's Briscoe Group was rejected "overwhelmingly" because it under-valued the outdoor clothing and equipment chain, although he also questioned Duke's lack of experience running a vertically integrated retailer.

Kathmandu's independent assessment of the offer, from Grant Samuel, valued the shares in a range of $2.10 to $2.41, above the implied $1.80 a share offer from Briscoe, based on a one-month volume weighted average price of Briscoe shares of $2.88. Kathmandu's shares rose 2.3 percent to $1.75 today and have slumped 50 percent in the past 12 months. Briscoe shares, which are illiquid because of Duke's majority holding, increased 1 percent to $2.93 and have gained 3.6 percent in the past year.

Briscoe, which is controlled by managing director Duke, is offering Kathmandu shareholders a mixture of cash and scrip in the enlarged company, at a rate of five Briscoe shares for every nine Kathmandu shares as well as 20 cents. Duke already owns 19.99 percent of Kathmandu, having acquired it at $1.80 apiece from institutions happy to take profit on shares that were languishing as low as $1.25 in June, before the offer was made. His stake would be watered down to 55 percent from the 80 percent of Briscoe he currently owns in a deal that would see Duke enter the Australian market, where Kathmandu currently earns most of its income.

"This would be highly accretive to Briscoe from day one while being a significant dilution for Kathmandu shareholders," Kirk told BusinessDesk. "Briscoe has no experience running a vertically integrated retailer - it's very different from selling other people's brands. But I'm not trying to be too judgmental given the offer so under-values the business."

Kathmandu stores predominantly sell house branded products, which are made to the specifications of in-house designers. Duke wasn't immediately available to comment on the rejection of his bid.

According to the Grant Samuel assessment, the offer implies an enterprise value to Ebit (earnings before interest and tax) multiple of about nine times, which is "substantially below" the median ratio for comparable transactions involving vertically integrated retailers of 12.1 times, it said. Based on forecast 2016 performance, Kathmandu would contribute more than half of the combined group's earnings, it said.

The takeover offer was opportunistic because it came after a weak 2015 performance by Kathmandu, characterised by aggressive stock clearances, smaller margins and increased costs. Kathmandu also incurred one-time costs including investment in its UK brand.

Kathmandu also gave a trading update that showed it expects Ebit to have slumped to $33.7 million in 2015 from $64.3 million last year, before recovering to $48.2 million in 2016. Sales are seen climbing to $409.4 million for the 2015 year from $392.9 million, and rising to $454.6 million next year. Its earnings margin, which probably halved to 8.2 percent in 2015, makes some recovery in 2016 to reach 10.6 percent.

Kirk said Kathmandu has had "a good winter sale period and has been able to demonstrate strong growth in margins."

BusinessDesk.co.nz

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