JNY's chances for landing Jimmy Choo just went up. The market might like this, but we can't get the numbers to work. Leverage chasing growth is a bad idea.
The media continues to swarm around the Jimmy Choo sale. Investcorp has apparently pulled out of the bidding for Jimmy Choo ahead of the May 11 deadline for all bids. This would leave Jones duking it out with TPG for the ‘prize.’ But there’s a big difference between these two – one can afford it, and the other cannot.
Numbers are spotty on Jimmy Choo. So let’s back into a value based on what current owner TowerBrook (and advisor HSBC) are suggesting. Specifically, on April 27th, in attempt to speed up the process, HSBC proposed an IPO at £650mm. Clearly, they’re going to throw out a lofty price to maximize valuation – so that’s probably well over what it will sell for. But let’s conservatively give it a 20%. Unfortunately, this is being priced in pounds. Kind of a tough time to buy an asset priced in pounds with a US $ right now. After netting out the haircut from the dollar translation, we’d still be looking at a purchase price of just over $800mm in US$.
This would require JNY to borrow virtually all of the purchase price – which would take its net debt to total capital up over 50%. On that amount of leverage, we’ll assume a 7% borrowing cost.
If we assume a 12% operating margin on that business, it suggests that we’d need to have the brand come in at $500mm in sales in order to be net neutral to the P&L. That sounds about fair.
But it’s the balance sheet component here that concerns us. We have yet to find a scenario for just about any company (or country, or individual) where levering up profitably solves a growth problem.
If JNY ends up ‘winning’ this deal without some kind of creative partnership to share in the financial burden but take away disproportionate economics, then we’ll be even more worried.
We remain very negative on this story.