Did Canadian Tire Overpay for Outdoor Apparel Maker Helly Hansen?
In this segment from MarketFoolery, host Chris Hill is joined by Motley Fool One's Jason Moser and Stock Advisor Canada's Taylor Muckerman to talk about a buyout north of the border: Canadian Tire -- a general retailer, despite the name -- last week announced its deal for specialty apparel business Helly Hansen. The buyer paid something of a premium, but the Fools see some synergies and opportunities in the new pairing.
A full transcript follows the video.
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This video was recorded on May 14, 2018.
Chris Hill: Let's move on to a deal from up north. This was from a couple of days ago, but I'm curious, Taylor, to get your take on this. This is Canadian Tire, which, the name suggests that's an automotive business, and presumably Canadian Tire started out that way, but it's now much more of a general retailer. Canadian Tire buying Helly Hansen, which is a sportswear brand. Seems like it's more outdoor gear.
Taylor Muckerman: Yes.
Hill: I'm curious what you thought of this deal. One of the things I read was that it seems like a good deal on the surface, although maybe Canadian Tire paid a little bit more than they could have. They paid close to $1 billion Canadian, that's somewhere in the neighborhood of just under $800 million U.S.
Muckerman: Yeah. The headlines say that they might have overpaid a little bit. You're looking at 18-20X EBITDA for Helly Hansen. But this is an apparel brand that has been growing nicely. You look at the last three years, growing about 12% on the top line year for year. Even higher as you flow down the income statement, so, there's some operating leverage there.
When you look at its target markets, Canada is its second-largest market, and it only sells about a quarter of its apparel in the Canadian market. You look at a company like Canadian Tire that already has some shelf space dedicated to Helly Hansen, maybe they can broaden shelf space, put some more product out there available. When you look at Helly Hansen, only about a quarter, maybe a little less than a quarter of its apparel is sold direct-to-consumer. This opens up some more lines for that. Obviously, if Canadian Tire owns it and is selling it, that's direct to the consumer for them, so a little higher margins, potentially. And, maybe pull back on the share buybacks, because this will increase debt. They already did have a decent debt load, so you maybe you pull back on those share buybacks.
But, a lot of folks think this is going to be immediately accretive, even just to a small degree, right away. But, I don't look for synergies in terms of them making their same clothes on same lines, that kind of synergy. But, a direct-to-consumer line, and then opening up more shelf space across the country. This is an international brand, so maybe a little bit more geographic exposure for Canadian Tire shareholders.
Hill: For the sake of argument, let's just say, maybe they overpaid a little bit for it. I mean, this is a company based in Norway. For that kind of international exposure, it seems like a smart move for them.
Muckerman: Yeah. You're looking at Sweden, Norway, the U.K and the U.S. all being the other top five countries that this brand sells into. Certainly, I think, a wise acquisition. The management team over the last decade or so has made two similar-sized acquisitions that have both worked out very well for shareholders. Small track record, but a positive one. We look for this deal to start making an impact almost right away.
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