Kathmandu tells investors to take no action on Briscoe bid

Morgan Stanley believes New Zealand retailer Briscoe’s bid for Kathmandu undervalues the adventure goods retailer.

A Kathmandu store on George Street in Sydney

Analysts at Morgan Stanley believe New Zealand retailer Briscoe’s $NZ1.80 bid for Kathmandu undervalues the adventure goods retailer’s business and a higher offer may be required to win over shareholders.

Briscoe formally launched a takeover offer for Kathmandu on Wednesday, offering five shares for every nine Kathmandu securities, plus NZ20c cash.

The New Zealand company emerged as a suitor this week after building up a 19.9 per cent stake in Kathmandu.

The offer price implied price earnings multiple of 11 times forecast financial 2016 earnings per share. However, excluding Kathmandu’s small loss-making operations in Britain, the offer only implied a multiple of 8.8 times financial 2016 earnings per share, the Morgan Stanley analysts estimated.

If the British business did not generate sufficient returns over time, the loss could be extinguished without any substantial write-off.

“At this price, the implied valuation multiples are below those of listed peers and from recent transactional evidence, which could suggest that a higher offer may be required to win over the shareholder base, particularly when Briscoe scrip is part of the offer,” they said.

They also said that the valuations were based on margins for financial years 2015 and 2016 that were well below historical averages because of cyclical and company-specific factors.

A revival of the business under a suitor with retail expertise could shift returns closer to the historical average of 20.7 per cent, they said.

Kathmandu’s board yesterday asked shareholders to take no action until the board fully evaluated the deal and gave further guidance.