The Equity market wants nothing but to sell KATE, and all the work we do on the brand's three-year roadmap won't change that dynamic over the near-term leading up to earnings next month (which look fine, by the way). But at a price, someone's gotta care about this name. Our LBO analysis arrives at a 29% IRR assuming a 50% take-out premium at current levels, and margin levels more than 1,000bp below other brands in the so-called 'handbag space'. And that's not even giving KATE credit for its $788mm in NOLs (equal to 29% of its equity value -- which is massive -- ie NOL is very high, or equity value low).
We've gotten so many calls from people saying 'I want to buy it, but I'm afraid of it.' Quite frankly, so are we given how irrationally it trades. But our numbers haven't changed. We think the business looks solid, and that ultimately the stock will follow the numbers. If its traditional shareholder list won't buy the name, perhaps a different one will emerge. The model makes a lot of sense from where we sit.
-The stock closed at $21.63 -- let's conservatively use a 50% discount to the current price.
-A capital structure of 50% Equity and 50% Debt gets us leverage of 7.0x on 2016 EBITDA of $304mm. This leverage is above current regulatory guidelines, but we think a bank would be willing to stretch for this deal due to its relatively small size and the 50% stake being taken by the equity holder. Additionally, the deal remains attractive even at lower leverage levels.
-We have revenue going from $1.7bn in 2016 to $3.3bn in 2020 and the EBITDA margin moving from 18% to 25%.
-With a 10x take out EBITDA multiple on our estimated take out EBITDA of $886mm we get an IRR of 29%.
-Importantly, there's also $788mm in NOLs that don't expire until 2028.