Noni B will acquire the Millers, Katies, Crossroads, Autograph and Rivers brands from Specialty Fashion Group (SFH) for $31 million in a major shake up of Australia’s discretionary retail sector.
The all cash deal comes at the end of a structural review into specialty fashion and will see SFH retain ownership of its most financially successful brand, City Chic.
Announcing the divestment on Monday, SFH and independent review committee chair Anne McDonald said offloading loss-making legacy brands while keeping the distinct City Chic business would optimise value for shareholders.
“In a challenging and rapidly changing retail environment, SFH has been successful in building City Chic into a market leader,” she said.
“The Board considers that a significant turnaround is required to reset the other businesses in the portfolio, and that this would require time, capital and carry material execution risk.”
A range of options were considered as part of a seven month strategic review into the business, including a whole of company transaction, alternative brand divestment and capital raising – but the independent review committee unanimously decided Noni B’s deal was optimal.
The independent review committee rejected a $100 million offer from Anchorage Capital Partners for the City Chic and Autograph brands in April.
SFH shares shot up 47 per cent in early Monday trading after the deal was announced to a one-year high of 56 cents.
Noni B confident in turnaround prospects
Noni B, which already owns the Rockmans, W Lane and Beme brands, will become one of the largest women’s fashion players in Australia under the deal, bringing its store footprint to over 1,400.
The business had 614 stores as at 2 July 2017, generating $316.8 million in revenue and a before tax profit of $5.9 million.
832 stores will be traded hands, with the businesses accounting for $642 million in revenue and a $25.7 million EBIT loss in 2017.
Noni B managing director and chief executive Scott Evans said that the combined business would deliver a myriad of synergies, bringing annual revenue to around the $1 billion mark.
“This is another exciting step forward for Noni B Group and represents the acquisition of five well-known and established iconic Australian brands that are both complementary and highly synergistic to our existing portfolio,” he said.
Noni B will undertake a $40 million equity raising to fund the acquisition. Major shareholder Alceon Group, which took over Noni B in 2014, is slated to participate.
Noni B expects to generate $30 million in cost of doing business efficiencies as a result of the acquisition by the end of FY19, excluding expected supply chain synergies.
The combined business would have generated earnings before interest, tax, depreciation and amortisation (EBITDA) of $31.1 million in calendar 17, including SFH’s portfolio optimisation benefits but excluding potential merger benefits and one-off costs.
After conducting due diligence over a number of months Noni B said it was confident it could turnaround the struggling businesses, but said it expects further deterioration in the near term with further losses in FY18.
“The businesses we’re acquiring are under-performing for a number of reasons,” Evans said. “However, we believe our disciplined approach to cost of doing business, combined with our customer focus, will ensure a successful turnaround.”
Noni B hopes that synergies and efficiencies will help the portfolio break even on an EBITDA basis in FY19.
The SFH deal is the second acquisition in the last three years for Noni B, which bought Pretty Girl Fashion Group – including the Rockmans Beme and W. Lane brands – in 2016.
A recapitalised Specialty Fashion
SFH will use the proceeds from the divestment to recapitalise the business, positioning it grow the City Chic brand at home and abroad.
The plus-size fashion business generated $14.1 million in earnings before interest, tax, depreciation and amortisation in 2017 from $134.2 million in revenue. Comparable sales growth was 16.6 per cent.
The business is expected to generate EBITDA of $19 – 20 million in FY18 on $138 – $140 million in revenue.
That will bring SFH in at the higher end of its previously announced underlying EBITDA guidance of between $14 – $20 million.
City Chic has been a standout performer for SFH in recent years, having grown into a profitable omnichannel operation with 37 per cent of its sales coming from online.
It has operations in Australia, New Zealand and the US (through a drop ship model into department stores and on Amazon), across 110 stores.
It was also announced that recently appointed chief executive Daniel Bracken will step down after overseeing the separation and transition process before SFH’s November AGM.
He will hand the reigns over the Phil Ryan, who is currently City Chic’s general manager.
