Sanuk Gets Bought, Who’s Deckers Anyway, Analysis of the Deal, Broader Industry Implications, and Related Ramblings
Three times sales?!?! They sold a $43 million company for $120 million cash plus an earn out?!?! Not in the middle of snowboard industry lunacy in the mid 90s did a company go for three times sales. Okay, there are three possibilities. First, the team at Sanuk (here’s the website link) is a bunch of silver tongued negotiating devils. Second, the management team at Deckers went drinking with the management team at Sanuk and the Sanuk team won. I suppose that’s just a variation of the first one.
The real second possibility, then, is that the guys at Deckers are desperate to be cool and didn’t know what they are doing. As you’ll see below where I describe Deckers, that’s unlikely. Decker’s history makes that clear.
The third possibility is that Sanuk’s margins justify this kind of purchase price. As much as I would like it to be one of the other two (because that would make a much better story) I’m think that’s probably it; Sanuk’s margins are through the roof.
Let’s look at the buyer, the seller, and the deal in a little more detail and see why I think that and what we can learn.
Deckers is a billion dollars company (2010 revenues) founded in 1975. In 2010 it earned $160 million. In 2006, revenues were $304 million and net income $30 million and yes, I wish I’d bought the stock back then. It owns the Ugg, Teva, Simple, TSUBO, Ahnu and Mozo brands. In 2010, Ugg was $875 million of its revenue and Teva $100 million. Obviously, the other brands are pretty small. Probably smaller than Sanuk.
25% of their business is international, and that’s where they see the most growth potential. They have 27 stores worldwide, and can see that growing to 150 in five years. Here’s how they describe their business:
“We strive to be a premier lifestyle marketer that builds niche brands into global market leaders by designing and marketing innovative, functional and fashion-oriented footwear developed for both high performance outdoor activities and everyday casual lifestyle use. We believe that our footwear is distinctive and appeals broadly to men, women and children. We sell our products, including accessories such as handbags and outerwear, through quality domestic and international retailers, international distributors, and directly to end-user consumers, both domestically and internationally, through our websites, call centers, retail concept stores and retail outlet stores. Our primary objective is to build our footwear lines into global lifestyle brands with market leadership positions. We seek to differentiate our brands and products by offering diverse lines that emphasize authenticity, functionality, quality and comfort and products tailored to a variety of activities, seasons and demographic groups.”
You can see why Deckers would be interested in Sanuk and why Sanuk might feel it was a good match.
Deckers is another billion dollar company with solid brands that plans to expand internationally and into retail and wants a solid entrée into the action sports/youth culture market. Well, there’s a new strategy none of us have ever heard of.
Sanuk is a strong, some would say unique, brand that, to use the old cliché, got a deal they couldn’t refuse. Let’s look at that deal as best we can and see why they got it.
What do we know? Not much, but why let that stop me from a little financial fantasizing. Purchase price of $120 million cash plus a five year earn out. 2010 Sanuk sales of $43 million. Deckers says the deal will add to their earnings this year. Even at that price.
I picked myself up off the floor after I initially saw the price and called somebody who’s familiar with our industry and has been both a strategic and a financial buyer of companies like Sanuk. Strategic buyers pay more and Deckers is definitely a strategic buyer in the case of Sanuk. What she told me is that the price discussion might start somewhere around eight to ten times EBITDA (earnings before interest, taxes, depreciation, and amortization) for this kind of deal.
I don’t know how to value the earn out, so let’s just work with the $120 million purchase price and assume they paid nine times EBITDA. That means that Sanuk’s EBITDA was $13.3 million.
I’m not going to try and get specific because, let’s face it, I’m creating this analysis with very limited information. But I’m guessing Sanuk’s depreciation and amortization is pretty low because they haven’t bought any companies and I don’t think they own a factory. With the margins Decker’s purchase price implies, they may not have had to pay much interest expense either. The biggest number below EBITDA, then, would be taxes. Pick a tax rate and remember this is California. Whatever reasonable rate you pick, you’ll see there’s a bunch of money going to the bottom line.
Let’s wander back to the upper part of their income statement. What do you think Sanuk spends for selling, general, and administrative expenses? I have no idea. What if we assume $10 million? That would be 23% of 2010 sales. Amortization and depreciation would be included in that. That would suggest that Sanuk’s gross margin is north of 60%. How much? You decide.
While we’ve been talking about 2010 numbers, it’s almost June of 2011. I’m guessing sales might be up for Sanuk this year, and that was certainly part of the discussion. Buyers don’t like to pay sellers for what might happen in the future. Hence the earn out. But significant growth in 2011 would help explain why the deal would add to Decker’s earnings this year.
Let’s talk strategically about some of the deals we’re seeing. The Wall Street Journal’s online Market Watch (catchy name) reported PPR CEO Pinault as saying, during his discussion of the Volcom acquisition, that “PPR didn’t make an offer for Volcom’s larger rival Quiksilver Inc. because Quiksilver has ‘reached a level of maturity.’” I agree with him and have raised the issue myself of where Quik’s growth could come from.
There’s kind of a perfect storm forming. Sellers remember that during the financial crisis and associated recession there were just no buyers out there unless you wanted to give your company away. They are also sitting there and wondering just how strong the economic recovery is and will be in the future. And they recognize that as the action sports business evolves into the youth culture business or maybe just the fashion business that they need some help breaking through in a number of areas that a large parent can provide.
Buyers need to reach the demographic our industry represents. Not just by age, but by culture and attitude. There’s some evidence that growing that kind of business internally is hard. Nike finally got it right, but it took them a lot of tries and a long time.
If you need to be in this market, and you can’t build it internally, it looks like you have to buy somebody. Should you buy somebody big? Well, there aren’t very many big ones and those that are big may have reached “a level of maturity” that makes them less attractive. Besides the intangibles you want to acquire aren’t necessarily related to the size of the acquired company. Is Volcom seven and a half times cooler than Sanuk just because it’s that many times bigger by revenue? Nah.
You are also making this acquisition because, as a strategic buyer, you believe that through your sourcing, back office, financing and existing distribution you can help the acquired company grow and be more efficient. A larger acquisition may not need that kind of help and the synergies you’re expecting may not exist. If there are no synergies, you probably can’t afford to be a strategic buyer and the price you’re willing to pay has to go way down.
You can see why more deals like this are happening in our industry. The economy is at kind of an inflection point where they make sense and market dynamics make them attractive to buyers and sellers.
