Stokehouse Unlimited, the California-based surf apparel and accessories company that manages the Vissla, Amuse Society and D’Blanc brands, has reportedly made a bid to merge its business with Rip Curl, which is owned by New Zealand-based KMD Brands (Group).

Stokehouse was reportedly launched on March 25, 2014, by surf industry veteran Paul Naude, the former CEO of Billabong USA.

In response to the proposal, which was first reported by the media, KMD Brands on Monday, March 23, confirmed that it had received a proposed transaction concept from the U.S. surfwear company.

With the support of its financial advisors, KMD Brands said it engaged with Stokehouse regarding the concept put forward by Stokehouse, which involved KMD Brands de-merging Rip Curl into a separate NZX (New Zealand Stock Exchange) and ASX (Australian Stock Exchange) listed company, and subsequently merging Rip Curl with Stokehouse.

KMD reported that Stokehouse proposed that, after Rip Curl’s de-merger from KMD Brands and its merger with Stokehouse, Stokehouse shareholders would own 22 percent of the merged entity.

“This proposed ownership structure is misaligned with the earnings delivered by the Stokehouse and Rip Curl businesses, given Stokehouse’s immaterial contribution to combined EBITDA and would unfairly dilute KMD Brands shareholders,” the Group said in the Monday media release. “In addition, Mr. Naude, the current CEO of Stokehouse, would be Chief Executive of the combined business, and he would lead the business from California.”

The Group said the KMD Brands Board of Directors “carefully evaluated the proposed transaction concept put forth by Stokehouse and determined that it is not in the best interests of shareholders as it does not provide a clear path to enhance shareholder value, as compared to the continued execution of the Next Level transformation.”

KMD Brands’ determination was said to be made regarding the following key factors:

  • There is a significant advantage in the composition and structure of the KMD Brands platform. The brands are highly complementary, with geographic, channel and seasonal diversity serving to derisk the portfolio.
  • The Stokehouse business has limited scale and profitability and has significant debt relative to its earnings profile.
  • The proposed relative ownership splits for the merger do not reflect the earnings contribution of the underlying businesses.
  • Separating the businesses would create significant dis-synergies, consume material resources, take substantial time, and incur material one-off costs.
  • The transaction concept would create two smaller entities with less combined profitability versus KMD Brands’ standalone, given the dis-synergies of separation and standalone costs.
  • The sources of the required debt and equity funding for both businesses are unclear and uncertain.
  • There is no new capital being introduced by Stokehouse, and, instead, the transaction concept relies on a large capital raising by the smaller de-merged Rip Curl-Stokehouse entity, which would create significant further dilution for KMD Brands shareholders in addition to the dilution they would suffer through Stokehouse shareholders owning 22 percent of the de-merged Rip Curl entity.

“The concept proposed by Stokehouse creates no value for shareholders and is challenging from an execution standpoint,” commented David Kirk, chairman of KMD Brands. “In addition, the combination of multiple surf brands that directly compete with each other is not a strategy that has proven effective. Our focus remains on executing the Next Level strategy, which has already gained momentum.”

Image courtesy Rip Curl/KMD Brands