Wary eye on talk of Kathmandu float

Peter Halkett says he's 'not able to talk' about a potential float, but the owners are looking to sell. Photo / Richard Robinson

It's the oldest trick in the book, says market commentator Arthur Lim.

"We call it kite flying."

The persistent chat that outdoor equipment and clothing retailer Kathmandu will list on the stock exchange has grown to a crescendo.

News agency Bloomberg reported this week that the public offer could come as early as next month, might raise A$400 million ($482.6 million), and investment bankers Macquarie Group and Goldman Sachs JBWere (half owners of Kathmandu) had been appointed as advisers.

This kind of reporting is no accident, Lim says. "It's a tried and true way of laying the scene in terms of getting an IPO off the ground.

"They get the information out there and see how institutional investors and investors respond to it.

"Particularly when the market has been in a pretty uncertain state, this is a very good way of surveying interest."

It was with little surprise then that the Herald received an invitation for an exclusive one-on-one with Kathmandu chief executive Peter Halkett.

Halkett says he is "not able to talk at this point" about a potential float.

But he confirms that the retailer's private-equity owners, Quadrant Private Equity and Goldman Sachs, are looking to sell.

"We've had a good period and the owners are looking at a number of options. [A float] is potentially one of those options.

"The owners are looking to sell because they feel the time is right for what they were trying to achieve and where the market's at at the moment."

With that comment Kathmandu ticks another of observers' float lead-up boxes.

Retail is a popular sector in a recovery, Lim says. He points to children's clothing retailer Pumpkin Patch - its share price has more than doubled in value since the start of the year as investors sniff rebounding consumer confidence in the air.

It is hard to assess the potential success of a Kathmandu float at this stage, because as a private company it releases little information. Halkett is not prepared to enlighten us.

"That information will become available in time."

The company made a net profit of $8 million in 2008 on revenue of $193 million. This was down from $13.7 million net profit in the previous 13-month period.

Halkett says the company has done well in difficult times and its performance improved "significantly" this year.

He concedes it remains heavily leveraged with debt running at around $170 million, but says its bankers are supportive.

He says the private-equity owners have invested heavily in the business since they paid founder Jan Cameron $275 million for it in 2006.

Market watchers are always sceptical about the motivations of the private-equity industry.

"History would indicate that they gear entities up, pay themselves back then offload the vehicle again to mums and dads and make their money," says Rickey Ward, domestic equities manager for Tyndall Investment Management.

But the Kathmandu story has not been about taking out costs and selling off assets, Halkett argues.

The chain has gone from 46 stores to around 83 since Goldman Sachs and Quadrant came on board.

It was a typical private company, with little prospect of expanding with the infrastructure it had. The new guard has corporatised it, Halkett says.

They have invested in new IT and point-of-sale systems, new warehouse and office facilities in Melbourne, a new head office in Christchurch.

There has also been a new management team, and investment in design resources.

"Really what we've done is we've put in place a platform that allows us to grow way beyond even today's scale.

"We expect to open another 40 [stores] over the next three years."

This would be the sound of more boxes being ticked, commentators say.

One market player, who did not wish to be named, said the offer would be packaged up with a couple of years of apparent growth, and there would be a "blue sky" component - promises of expansion such as a rollout of new stores.

"But my experience is that growth typically doesn't eventuate."

He is also cynical about the timing of an offer. "Private equity has decided now is a good time to be selling retail stocks - that usually means it's not a good time to be buying it."

Halkett says when potential buyers get to see the full information the Kathmandu story will speak for itself.

"We do not have a loss-making store in Australasia, out of 80 stores."

Britain has been a different story for the retailer, where its six stores do not break even, but Halkett says the UK market is being kept on the back-burner for the next phase of Kathmandu's development.

With talk of New Zealand's first IPO in over a year the spectre of the disastrous Feltex public float raises its head again.

Halkett reminds the critics there have also been good floats. "I get disappointed with that comparison.

"If everything is going to be geared around Feltex, well there's not going to be a market in New Zealand, is there?

"The vast majority of New Zealanders and the business community, I would imagine they would want to see this business become available in some form."

The chief executive believes Kathmandu has its formula right.

It has done for outdoor wear what Australian surf brands such as Billabong and Rip Curl have done for surfwear - it has moved it from being purely technical gear to an association with lifestyle and attitude.

While everything Kathmandu designs is made for a purpose, it has become a more efficient producer enabling it to compete on price. This has opened the product up to a wider market, he says.

"[We have] moved into the more mainstream market and made it affordable for typical Kiwis and Aussies to actually buy technical gear and go camping.

"For any future owner there is still a lot of potential."

The criticism aside, Tyndall's Ward believes Kathmandu stock would be reasonably well sought after, depending on pricing.

And he says there is pent up demand from investors seeking equity opportunities. "We hear there's a lot of money on the sidelines waiting for the right opportunity to invest."

But what he wants to see from private equity owners is skin in the game.

Hanging on to a stake in an offer is the only way investment managers have of keeping them honest - "just enough to make it hurt if it doesn't get delivered", he says.

It could potentially create issues of pricing and a stock overhang, but overall he would take it as a healthy signal.

There have been precious few examples of this in recent times, perhaps not since the days of Rod Duke and Briscoes or Jim Delegat's listing of his wine business, Ward argues.

But Arthur Lim doubts Goldman Sachs and Quadrant would want to sell down completely.

"It's all about price - if they could get top dollar they probably would, but that's unlikely."

Meanwhile Ward questions whether Quadrant and Goldman Sachs may be coming back to the market to avoid having to stump up with a second instalment of required funding.

A private-equity deal often requires half the money up-front and then the other half in the future. But the hope is that the private-equity owner gets paid dividends and reinvests those, avoiding the need to come up with more cash, he says.

"I think there's been a number of occasions [recently] when there's been a call on the second instalment, which none of them have been used to."

With speculation of a dual Australia-New Zealand listing the worry is that the placement would be mostly in Australia "which will be a shame for ourselves", Ward says.

Halkett's only comment on this is that Kathmandu is very aware of the importance of its Kiwi customers and Kiwi heritage.

"If it gets to that we won't neglect them."

The question Brian Gaynor of Milford Asset Management asks is, where is the money going?

Whether funds from a float go into the company or to the former shareholders create different sets of criteria, he says. "If the money is just going to the previous owners, how are they going to fund [this] growth?"

Ward's final piece of advice to mum and dad investors who may be eyeing the opportunity is to be guided by the institutional investors.

He says the institutions didn't touch Feltex for good reason, and small investors failed to be warned by this.