Kathmandu's merger with surf brand Rip Curl will catapult the dual ASX/NZX-listed outdoor equipment and clothing retailer into billion-dollar company territory.
The retailer yesterday announced its intention to acquire Rip Curl for A$350 million ($368m) - almost 50 per cent of its market capitalisation of $687m, subject to shareholder approval. A meeting for this has been scheduled for October 18. The transaction is expected to be completed by the end of the year.
Kathmandu expects the acquisition to lift its earnings by 10 per cent in the 2020 financial year, expected to take the company into new growth territory.
READ MORE: • Kathmandu buys surfing brand Rip Curl for $368m
Close to five years ago Kathmandu experienced a lull. Its share price plummeted and its apparel seemed to have fallen out of favour with consumers. There was a period where its balance sheet looked to edge towards the red.
Fast forward to today and the company seems to have rejuvenated its product lines, has invested in new and refurbished stores and gone through a "successful" acquisition of American footwear company Oboz. This has seen the company increase its share price by more than 9 per cent, and post an annual net profit of $57.6m in the year ended July 31.
It sales during the last financial year increased by 9.7 per cent to $545m.
ShareClarity head of equity research Carolyn Holmes said Kathmandu's Rip Curl takeover was a positive move.
"This acquisition shows that under the existing management they are willing to look at these acquisitions which are complimentary to their existing business," Holmes said. "It'll be interesting to see as they go through and integrate the businesses just what they are able to achieve and what costs they can take out."
Retail NZ chief executive Greg Harford agreed, saying the takeover was "a big deal" and Kathmandu and Rip Curl would complement each other.
"It's really good to see a New Zealand retailer being able to make sizable acquisitions from abroad and looking to expand.
"Rip Curl is quite complementary to the existing Kathmandu offer - it makes strategic sense for them to be making the acquisition. It will give them a much stronger network of both brands and physical outlets, and boost its ability to take the business forward substantially."
Holmes said the two brands could adopt a similar model to Briscoes Group which likes to operate multiple retail brands stores located close to each other, or the group could re-establish a network of Rip Curl stores.
Kathmandu was on an upwards trajectory. In the last few years it had done the hard yards to get the brand back on track and re-establish itself as a "brand consumers know and love and trust", Harford said.
Rip Curl's financial performance has been ho-hum in recent years. Revenue in the last two years has grown 2.8 per cent while profits have remained flat.
Pie Funds portfolio manager Mark Devcich said he believed $368m was a fair valuation for the Rip Curl business, despite its flat financial performance.
"Because they focus more on technical products rather than just apparel they've got a bit of a niche in that market; wetsuits, surfboards and other technical equipment," Devcich said.
The risks in the deal included large store footprints, and "if the trend away from surfing brands continues", he said.
Surf market 'savaged' in recent years
Rip Curl has not been immune to rough waters in the surfwear industry. It, like Billabong and Quiksilver, for a period faced declining sales. Though it has not faced fall out from overexpansion like Billabong, bought by rival surfing company Quiksilver for A$198m ($210m) last year, did.
The surfing brand, founded by surfers Brian Singer and Douglas Warbick in Bells Beach, Australia, in 1969, hired a Bank of America consultant in 2012 to explore a sale or partial sale of the business, the Financial Times reports.
The surf market had been "savaged" in recent years as brands moved "from cool to commodity", Chris Wilkinson, managing director of First Retail Group, said.
"For long-standing brands to appeal to today's consumers, they need to reinvent themselves - reflecting values and aspirations of younger consumers that are their target markets. Their loyalties are fluid and expectations are different to what they were when these brands were in their heyday. That will be Kathmandu's first challenge," Wilkinson said.
"The second challenge is moving from function to fashion. Kathmandu clothing is worn typically by need, so the discretionary and aspirational nature of [Rip Curl's] fashion clothing will be new territory for the group to master."
With Rip Curl, Kathmandu will own and operate more than 340 stores, including 254 licensed Rip Curl stores and have relationships with over 7000 wholesalers.
In a statement, Kathmandu chief executive Xavier Simonet said the acquisition would allow Kathmandu to "grow and diversify".
"The acquisition of Rip Curl transforms Kathmandu into a NZ$1b outdoor and action sports company, anchored by two iconic global Australasian brands. The combination of Kathmandu, Oboz and Rip Curl achieves diversification in product, channel, geography and seasonality, and creates a platform for the acceleration of our brands' global expansion into new channels and markets," Simonet said.
"Importantly, there is also strong cultural alignment between our brands, underpinned by a shared focus on quality, innovation and sustainability."
Rip Curl chief executive Michael Daly will continue to lead the brand's management team from the company's Australian headquarters in Torquay. He will report directly to Simonet.