Is Kathmandu up for sale?

Retailer Kathmandu (ASX:KMD)  shares rise by twenty percent as New Zealand retailer Briscoe Group (NZX:BGR) announce ‘imminent’ takeover bid.

New Zealand retailer Briscoe Group (NZX:BGR) has announced their intention of acquiring travel and adventure retailer Kathmandu Holdings (ASX:KMD). Briscoe Group owns the Briscoe’s Homewares and Living and Giving brands as well as the New Zealand chain of Rebel Sport stores.

Until the takeover terms have been announced it is unclear what price will be offered to Kathmandu shareholders. It has been reported that the deal will include both cash and Briscoe’s shares.

Kathmandu has found trading conditions very tough in 2015. The company announced a loss in its half yearly report as management embarked on widespread discounting to clear excess inventory. The company does however, generate most of their trading activity in the second half of the year.

Analyst forecasts predict FY2015 will see the company generate earnings per share of 11.6 cents rising to 13.2 cents in the year after that. Both of these figures are well down against the 19 cents generated in the previous financial year.

P/E (bid $1.85) 9.7415.9514.02
P/E (bid $1.93)10.1616.6414.62
P/E (bid $2.00)10.5317.2415.15

Acquirers typically need to pay a control premium of between 20-30%. If you use the price at open today on the ASX, this would imply a takeover price between $1.85 and $2.00 per share with an average bid price of $1.93.

The median P/E ratio for mergers and acquisitions in the retail industry, dating back to the year 2000, is 12.5x earnings.  Using the 2014 earnings per share figures as guide, a potential bid at these prices would appear very opportunistic. This is especially so when you consider that the most recent M&A transactions in the retailing industry (four in 2014) had a median P/E ratio of 18 times.

Briscoe’s appears to be hoping many Kathmandu shareholders, who have seen the stock price fall almost 70% since May 2014, may see a takeover as a convenient exit from what has been a very tough investment. 

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