Duke scoffs at Kathmandu projections after takeover offer rejected as too low

Thursday 6th August 2015

Rod Duke says Kathmandu may struggle to achieve the rebound in earnings it has projected for 2016 as part of its argument for rejecting his takeover offer as too low.

Kathmandu's independent assessment of the offer from Duke's Briscoe Group valued the shares in a range of $2.10 to $2.41, above the implied $1.80 a share offer. Kathmandu shares rose 2.3 percent to $1.75 after the company urged shareholders to reject Duke's "opportunistic" approach.

The outdoor clothing and equipment chain today gave a trading update that showed it expects Ebit (earnings before interest and tax) to have slumped to $33.7 million in 2015 in the face of discounting, narrower margins and a disappointing Christmas season, from $64.3 million last year, before recovering to $48.2 million in 2016. Sales have climbed to $409.4 million for the 2015 year from $392.9 million, and are forecast to rise to $454.6 million next year. Its earnings margin, which halved to 8.2 percent in 2015, is expected to recover in 2016 to reach 10.6 percent.

But Duke says it isn't clear that Kathmandu's strategy will achieve the recovery in earnings, or that it is adequately dealing with its challenges.

"There is a lot of blue sky in their 2016 forecast," he said. "Kathmandu’s 2015 second half Ebit numbers are frankly very disappointing at nearly 30 percent down on the corresponding period and below market expectations especially due to a strong tail wind from a timely cold snap. The question remains why the market would believe Kathmandu is so confident that its self-confessed internal and external challenges are over."

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.

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."

Duke was less guarded in his response. "Kathmandu’s catalogue of excuses and ambitious assumptions highlights the enormous execution risks inherent in achieving the company’s forecast targets in contrast to the certainty, experience and track record of delivery which are available to Kathmandu shareholders by accepting the Briscoe offer," he said.

Of the target company statement, he said: "As the largest shareholder in Kathmandu we will be taking a very close look at this 140 page document, which to us feels high on rhetoric and low on substance." He made no comment on whether he would lift his offer.

Kathmandu's independent assessment of the offer, from Grant Samuel, says the offer implies an enterprise value to Ebit 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.

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

Briscoe shares rose 2.1 percent to $2.96.

BusinessDesk.co.nz

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