All Black vs. retail legend - the battle for Kathmandu

Kathmandu's stock closed down 2c yesterday at $1.68. Photo / File

David Kirk and Rod Duke go head-to-head in the fight for the outdoor clothing retailer.

They are two men who have taken very different paths to the top of the business world.

One is a Rhodes Scholar whose varied CV includes a medical degree, captaining the All Blacks to World Cup victory and big roles with high-profile firms including Australasian media giant Fairfax and Fletcher Challenge.

The other is a die-hard retailer who has spent his entire career in the sector, having started out as a 16-year-old selling shoes in Adelaide.

Briscoe Group's takeover bid for outdoor apparel and equipment chain Kathmandu has brought David Kirk and Rod Duke together in one of the most lively acquisition plays the NZX has seen in recent years. It's got all the elements, including well-known brands, strong personalities and a hefty dose of hostility.

Kathmandu chairman Kirk last week advised shareholders to reject Briscoe's offer. He said it was opportunistic - coming while the company's share price is under pressure following a difficult 2015 financial year - and undervalued the firm.

As things stand, Duke's Briscoe Group is offering five of its own shares for every nine Kathmandu shares, plus 20c cash for each Kathmandu share, implying a takeover price of $1.80 per Kathmandu share.

Kathmandu's stock closed down 2c yesterday at $1.68. An independent assessment of the offer, conducted by Grant Samuel, valued the company's shares in a range of $2.10 to $2.41.

If successful, the takeover would give Briscoe, which already owns 19.99 per cent of Kathmandu, exposure to the Australian market and create a transtasman retailer with annual revenue of more than $900 million and an $847 million market capitalisation.

The tough talk has continued on both sides of the deal this week.

Kirk reiterated his view that Duke, who controls Briscoe with an 80 per cent stake, doesn't have the skills to run a vertically-integrated retailer like Kathmandu, which designs and manufactures its own product. Duke's highly successful Briscoes and Rebel Sport chains sell brands sourced from suppliers.

David Kirk. Photo / Greg Bowker

"It's just a fact that there is no experience in Briscoes in managing vertically-integrated, branded retailers," Kirk told the Business Herald. "There's no one there that knows how to do that."

Duke questioned how much Kirk knows about retailing.

"With the greatest respect to David ... to be brutally honest I'm not sure that Dave is enough of an expert to make any comment at all."

Kirk admits that he isn't a "career retailer" like Duke.

But he pointed out that he was also chairman of cinema operator Hoyts Group, a retailer of sorts, while also having a lot of experience with e-commerce, a growth area for Kathmandu, including through chairing NZX-listed Trade Me.

Duke said he didn't see anything wrong with the design and manufacturing side of Kathmandu's business.

"But like everyone else I see plenty wrong with the way they manage and run the merchandise through their stores," he said. "This is the big issue."

Kirk said Duke was "naive" to suggest improvements were not needed in Kathmandu's design and manufacturing operations.

"Our belief is there are opportunities for continuous improvement across the whole business."

Rod Duke. Photo / File

In its target company statement, Kathmandu said it intended to "review and refine" its discount promotions model.

Most of the retailer's revenue is derived through three major sales each year, with discounting increasing towards the end of each sale.

"Basically what we've done is we've educated and we've taught customers not to buy at all except in sales," Kirk said. "Given that the sales are a pretty brief period of the year, if for some reason the sale doesn't work for us, then we become exposed. I think that is a good part of what's caused the sales to be more volatile than they need to be."

He said Kathmandu wasn't going to ditch its "high/low" sales model.

"But in the winter sale that's just been we didn't have anything on sale for more than 50 per cent off," Kirk said. "In all our previous sales in the last few years, we've gone to 60 per cent off and even 70 per cent off to drive more sales and that's come at the cost of margin."

Earlier this week, Kathmandu said long-serving chief operating officer Mark Todd would leave at the end of next month. Todd joined the firm in 1998 and was acting chief executive through much of the 2015 financial year until new chief executive Xavier Simonet took the helm on June 29, the day before Briscoe launched its takeover bid.

The company said last week that it expected to report a full-year profit of $20 million for the year to July 31, down from $42.2 million last year. It has given guidance for a $30.2 million profit in the 2016 financial year - a forecast Duke has labelled "optimistic". The company has also forecast earnings before interest and tax to increase by 43 per cent to $48.2 million in the 2016 financial year.

"Kathmandu's board is asking shareholders to take a huge leap of faith in trusting them, with an untested management, to remedy a number of key issues and to drive the forecast 40 per cent lift in earnings," Duke said.

Kathmandu has warned shareholders that they would lose some of the liquidity they currently enjoyed if the takeover goes ahead.

Duke is expected to retain a 55 per cent stake in the combined firm if the deal takes place. The offer will remain open until September 17, unless extended.

What's next?

• The offer is open for acceptance until September 17, unless extended.

• Briscoe may have to increase its offer in order to get it over the line.

• If successful, the takeover will give Briscoe a presence in Australia and create a transtasman retailer with annual revenue of more than $900 million and an $847 million market capitalisation.

• Kathmandu will report its full-year result on September 29.

Duke likely to play hardball, analysts say

Kathmandu's rejection of Briscoe Group's takeover bid last week put the ball in managing director Rod Duke's court to either increase his offer or withdraw. Analysts say he is likely to play hardball.

Craigs Investment Partners analyst Mark Lister said it wasn't clear who was going to win.

"It's really difficult to take over a company when you don't have the support of the independent directors or the stamp of approval, and to get that approval, Duke will have to basically up that offer to $2.10," Lister says.

"I think he'd be happy to walk away if he's faced with a choice of paying what he sees as too much."

Lister said the traditional move for company takeovers was to offer a lower bid initially, and keep a few cards up the sleeve, adding that he wouldn't be surprised if Duke tweaked the bid up slightly, although this was likely to be a higher cash offer rather than more shares to keep his share of the company above 50 per cent.

"Cash is always more attractive to the market and other investors, so people would view it more positively if the cash component was increased but Duke [will] play hardball for the time being."

JB Were equity manager Rickey Ward was sceptical about whether Duke would increase his bid.

"Rod's got a reputation of being very steadfast so if he says he's going to bid $1.80 then $1.80 is the price," Ward said. "It doesn't mean he won't increase it, but history would indicate he has shown an incredible reluctance to do anything but what he presents."

Ward and Lister agreed the big question was whether the issues Kathmandu had faced over the last few years could be turned around or whether they were longer term, Lister adding that there was a lot of gamesmanship on both sides.

Salt Funds Management's Paul Harrison said he thought the high valuation of Kathmandu was slightly unrealistic.

Ward said Duke's other option was to reconstruct the bid, offering more cash than shares but he faced other issues in convincing Kathmandu's shareholders to sell.

"In my mind his hardest task is convincing foreign investors of who he is and the merits of relinquishing Kathmandu and owning Briscoe's shares, because he's pretty unknown in Australia," Ward said.

Harrison also thought more cash would likely sway more shareholders.

- Holly Ryan