RGC Corporation Limited (ASX: RCG) announced that it has entered into a binding agreement to acquire 100% of the shares in Hype DC Pty Ltd, which is an Australian retailer of branded athleisure and style footwear, for six times Hype’s normalised FY 2016 EBITDA. The purchase price for the deal is expected to be approximately $ 105 million.
Rise in annualised EBITDA for FY17: The transaction is expected to be materially EBITDA and EPS accretive in FY 2017, and the FY 2016 underlying EBITDA is expected to be around $ 60 million, which is at the top end of the guidance range. Following the acquisition, the acquirer is targeting annualised FY 2017 underlying EBITDA of $90 million. As a combined entity for the financial year to June 2016, underlying EBITDA would have increased approximately 30% from $ 60 million to $ 77.5 million and underlying EPS by approximately 16%, on a pro forma historical basis.
Strategic fit for portfolio diversification: The RCG board believes that the acquisition is highly strategic for a number of reasons. It is significantly earnings accretive and represents portfolio diversification with over 350 stores strengthening the position as a regional leader in the retail and distribution of branded footwear. The additional 60 Hype stores will provide opportunities of scale leading to greater flexibility in the exploration of new revenue opportunities and potential cost savings and efficiency improvements.
Strategic Acquisition (Source: Company Reports)
Ease of developing new retail formats: Both brands will provide enhanced vertical strategy and RCG’s board believes that the acquisition will enable the group to accelerate the rollout strategy, which is more likely to bring greater certainty of both brands as well as the retail channels. The new retail formats from the combined entity will be easier to develop and rollout.
Leveraging fashion trends: Hype operates 57 Hype DC and 3 Shubar retail stores in Australia predominantly in metro and major regional locations. In addition, it operates substantial and growing fully integrated online retail business under both the banners. Group sales for FY 2016 were approximately $ 120 million.
The mono branded Shubar stores carry the full range of men's and women's shoes, boots and sandals as well as a tight range of other premium brands including several of RCG group’s brands. The mission is to uncover global trends and make them accessible to individuals who are fashion conscious.
Targeting youngsters: Through the deal, RCG is targeting 15 to 25 year oldsas Hype sells premium, exclusive and limited edition sneakers from leading brands, including Nike, Adidas and Converse.
The purchase price, expected to be approximately $ 105 million will be funded via $ 52.5 million by way of a share placement to Hype shareholders subject to voluntary escrow for two years, $ 13.1 million by way of an unsecured vendor note and $ 39.4 million by way of a combination of secured senior bank debt and cash.
Following the completion of the transaction, the group will have drawn senior debt of $ 77 million. RCG’s stock price has surged 21.23% in the last five days (as at July 07, 2016).
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