Kathmandu Holdings Ltd is urging its shareholders to reject a hostile offer from a rival New Zealand retail group, arguing it's an opportunistic play that undervalues the outdoor specialty retailers’ longer term value.
Kathmandu said an unsolicited NZ$1.80 per share offer from Briscoe Group Limited that expires September 17 undervalues Kathmandu's shares by as much as 25 percent. The offer implies an EBIT multiple of 9.0, which Kathmandu Chairman David Kirk argued is substantially below the median multiple for comparable transactions.
“Briscoe can afford to offer a lot more for your Shares,” Kirk wrote in an Aug. 10 letter to shareholders. “The Offer has been timed to exploit recent weakness in Kathmandu’s Share price and an isolated period of challenging trading conditions.”
Kirk was referring to Kathmandu's disappointing results in the first half of fiscal 2015, when challenging trading conditions and higher spending on strategic initiatives squeeze margins. Though based in New Zealand, Kathmandu operated 100 of its 150 stores in Australia in fiscal 2014, 45 in New Zealand and 4 in the United Kingdom. In the first half ended January 31, 2015, the retailer swung to a loss of NZ$1.8 million on a 7 percent increase in sales, compared with a profit of NZ$15.0 million a year before. Executives attributed the disappointing results in part to heavy discounting in August and September of 2014 that reduced margins and cannibalized more profitable holiday sales.
By contrast, EBIT at Briscoe's Sporting Goods segment, which operates 33 retail locations primarily under the Rebel Sports banner, grew 45 percent in the fiscal year ended January 25 on top of a 22 percent increase the prior year. Same-store sales at the segment increased 7.27 percent during the six months ended July 26, according to Briscoe's latest earnings report.
A dubious defense
Despite these numbers, Kirk argued Kathmandu is a more geographically diverse, vertically integrated retailer with a focus on faster growing outdoor travel and adventure products, while Briscoe is a lower growth, New Zealand-only retailer with a greater focus on slower growing homewares and full-line sporting goods. He also argued that Briscoe's offer presents considerable risk because it consists primarily of Biscoe stock rather than cash.
Briscoe launched its takeover bid July 1 after announcing it had acquired a 19.9 percent stake in Kathmandu. In a detailed defense of Briscoe's offer published August 7, Managing Director Rod Duke said Kathmandu management has had year to address shortcomings at its business.
“Anyone who follows Kathmandu closely will know that same-store sales growth across the group has been in decline for the past four years,” Duke wrote. “The failure to address this was always going to catch up with the company.”
Kathmandu COO exits
Three days later, Kathmandu announced Chief Operating Office and Finance Director Mark Todd would resign August 30, nearly a year ahead of schedule.
In a statement issued by Kathmandu, Todd said he had decided to move up his resignation regardless of the outcome of the current takeover offer from Briscoe Group.
“With Xavier (CEO Xavier Simonet) on board I feel it is the right time to step aside entirely,” said Todd, who had directed operations through last year's holiday season. “I’m very proud to have contributed to Kathmandu’s growth. The business has grown 20 fold since I joined in 1998.”
