Just two months after divesting its Cross pen business and renaming itself to focus investors on the value of its rapidly growing sunglasses business, Costa Inc. agreed to be acquired by optics giant Essilor International for a rich premium.
In the all-cash transaction, Costa shareholders will receive $21.50 per share, representing a 19 percent premium on the volume-weighted average share price over the past six months. The approximately $270 million price tag corresponds to 2.8 times Costa’s revenues from continuing operations for the trailing 12 months – a very rich valuation that approaches what Oakley received when it was acquired by Luxottica during the height of the M&A market in 2007.
The deal comes as Costa Inc. strives to transform Costa from a brand popular among fishermen and water sports enthusiasts in the Southeastern United States into a national brand. The company, which also owns the Native eyewear brand, is also targeting the prescription eyewear market, where competitor Oakley has a big lead thanks to its parent company Luxottica Group, which owns Lens Crafters and Pearle Vision Center. Prescriptions sales now account for just 5 percent of Costa Inc.’s revenues, which are expected to hit $100 million this year.
The acquisition will enable Costa to leverage Essilor’s expertise in surface coatings to develop innovative products for specific needs, such as anti-fog or hydrophobic lenses. Essilor, which sells products in 400,000 stores worldwide, will also turbo-charge Costa’s efforts to penetrate the prescription sunglasses market. Essilor spends about €150 million annually on research and development and has signed agreements to buy 20 optical labs in 2013, including at least three in the United States. The company has also agreed to pay $1.73 billion for a 51 percent stake in Transitions Optical Inc., the leading provider of photochromic lenses to optical manufacturers worldwide.
“The high quality sunglasses and prescription sun lens segment offers high potential given its low penetration rate,” Essilor Chairman and CEO Hubert Sagnières said.
Essilor, which reported sales of €5 billion in 2012, will finance the acquisition from its cash reserves. The transaction is expected to close in early 2014, subject to approval by regulatory authorities and a majority of Costa shareholders. If Costa accepts a superior offer before then, it must pay Essilor an $8.9 million break-up fee.
Essilor expects the acquisition will be accretive to its earnings in 2014.
Essilor identified Costa ad one of the fastest growing sunglasses brands in the United States, but noted the majority of its sales still come from the Southeast.
Based in France, Essilor is one of the world’s largest manufacturers of corrective lenses.
“When viewed in comparison with comparable transactions we believe that this transaction represents significant value to our shareholders,” said Costa CEO David G. Whalen, who will be paid $3.3 million in cash should the transaction close. Costa’s CFO Kevin Mahoney and Tina C. Benik will earn lump sum termination payments of $676,425 and $545,500 if the deal closes. Charles MacDonald, president of Cross Optical Group, can earn a $850,000 onetime payment if he stays on with the company for nine months.
Under the terms of the merger agreement, certain shareholders owning in the aggregate approximately 34 percent of the outstanding common shares of Costa have agreed to vote in favor of the transaction at a forthcoming special meeting, subject to certain conditions.
D.A. Davidson & Co. is serving as Costa Inc.'s financial adviser and Weil, Gotshal & Manges LLP is acting as Costa Inc.'s legal counsel.
