At $260M, did Rapha’s new owners pay too much?

LONDON — With the lengthy Rapha sale saga now officially put to bed with this month’s acquisition by Walmart grandsons Steuart and Tom Walton, time has been afforded to reflect back and assess the winners and losers in the deal. In a new report, cycling publication Cyclist has done just that — offering texture on the rationale behind the acquisition, and why the price was so controversial.

Quick refresher. Having held a slew of conversations with potential buyers over the last several months, Rapha made it clear they were searching for a buyer, but the process seemed to undergo an on-again, off-again undulation. It eventually came to light that one of the biggest sticking points for getting the deal across the line was the asking price. Rapha’s shareholders were holding out for a $260M deal, and for most would-be buyers, that sort of price for a luxury brand that only made its first profit in 2016 — a mere $1.4M on $62.1M in revenues — after twelve years in operation was a little too rich for their blood.

In the end, Rapha got their full asking price, and in the Waltons, two avid cyclists and thus two great stewards of the brand — a big concern for shareholders.

Still, why was Rapha looking to sell in the first place? Cyclist reports that the company was constrained by its revenues — having to constantly reinvest its profits annually in order to grow. The sale now gives the brand an injection of capital to expand much faster. They’ve also switched to a bank that’s offering it more than double its credit line from its previous bank. Per Cyclist: “Up until March this year, the firm was dependent on a short-term loan of £8m [$10.24M] that needed to paid back every year. According to Rapha’s latest financial statements, it has swapped Barclays for…HSBC and is in the process of more than doubling its bank lending to £20m [$25.6M].”

The meat of the report:

In the year to January 2017, Rapha’s £67m of sales resulted in earnings…of £4.5m. . . . That’s equivalent to over 44 years of current earnings.

Such…earnings multiples, are the bread and butter to private equity funds. Each investment varies, but it’s fair to say they tend to get a little twitchy when such a multiple moves into double-digit territory.

[. . . .]

[CEO Simon] Mottram said he was ‘blown away’ by the amount of interest in the brand. With several bidders prepared to stump up big investments, there is an argument that Steuart and Tom Walton’s RZC Investments simply paid the going price. . . . Whether RZC ended up overpaying can only be judged in the fullness of time.

But despite their riches, the Waltons will expect a return for their investment.

Last but not least: any plans to sell Rapha gear in Walmart? Not a chance. “One thing’s for sure, Mottram insists, we won’t be seeing Rapha clothing on sale in supermarkets such as US giant Walmart.”

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