Specialty Fashion shares surge 46pc on Noni B deal

Specialty Fashion shares surge 46pc on Noni B deal

Source: The Australian Financial Review.
By: Sue Mitchell.

After coming close to collapse in 2014, Noni B is set to become Australia’s largest women’s wear retailer after outlaying $31 million for Specialty Fashion Group’s loss-making Millers, Katies, Crossroads, Autograph and Rivers brands.

The deal, revealed by Street Talk on Sunday night, will boost Noni B’s sales from $311 million to about $1 billion, lift volumes of garments sold by 30 million to 43 million and expand its store network from 645 to more than 1350 – exceeding clothing sales and stores at Solomon Lew’s Premier Investments.

Chief executive Scott Evans, who has executed a stunning turnaround since Alceon Group’s $16 million takeover bid in 2014, has no qualms about doubling down in arguably the most unloved segment of the clothing market – fashion for women aged over 55 – or expanding his store footprint at a time when most bricks and mortar retailers are shuttering shops.

“The [brands] all have slightly different DNA and they cater to different sectors – the core customer set is the same but that’s a strength rather than a weakness,” Mr Scott told The Australian Financial Review.

Alceon executive director Richard Facioni said mature women’s fashion was an under-catered segment.

“It’s a large market segment and she’s a loyal customer if you look after her [with] service, product, value – things we understand well,” he said.

The five brands lost $6.2 million before interest, tax depreciation and amortisation on sales of $642 million in calendar 2017, but Noni B expects the new portfolio to break even in 2019 after cutting costs. Synergy benefits are expected to exceed $30 million and will flow through in 2019 and 2020.

“I don’t think those brands are fundamentally wrong,” said Mr Evans. “They’ve done it tough for a while but with some new confidence and some new vigour those brands can return to where they were.”

Noni B sales have risen three-fold since 2014 – when Alceon Group acquired the founding Kindl family’s stake for 51¢ a share – boosted by the $75 million acquisition of Pretty Girl Fashion Group’s Table Eight, Rockmans, BeMe, and W. Lane brands.

Euromonitor consultant Bettina Kurnik said that, for all the talk about Millennials, vast numbers of mature Australian women were looking for affordable and suitable fashion.

Mr Scott also dismissed suggestions Noni B would close stores, although about 82 stores are earmarked to close between now and July, when the deal is due to complete.

$40 million capital raising

​Noni B will fund the deal by raising $40 million – $24.5 million through an institutional placement and $15.5 million through a fully underwritten accelerated non-renounceable entitlement offer at $2.50 a share, a premium to Noni B’s close on Friday of $2.35 but in line with its share price a week ago.

Alceon Group will invest another $6 million to subscribe for its full share of the entitlement offer but will not participate in the placement, diluting its stake from 42 per cent to about 36 per cent.

Shares in Speciality Fashion, which retains the fast-growing plus-size brand City Chic, surged 58 per cent to 60¢ on confirmation of the deal.

“They’re divesting assets that lost $6 million EBITDA in [2017], so to achieve $31 million in proceeds and retain the crown jewels, at face value it looks like a pretty good outcome,” said Sandon Capital analyst Campbell Morgan.

Sandon and Lazard Asset Management had previously called on the company to raise capital rather than sell key assets such as City Chic at firesale prices.

Unlocking potential

The deal followed a seven-month strategic review, during which time Specialty Fashion considered selling its entire business, selling individual brands or raising capital to shore up its balance sheet.

Chairwoman Anne McDonald said retaining City Chic, which has strong cash flows and growth prospects, and divesting the rest of the portfolio, which would have required significant capital to fix, would maximise value for shareholders.

“We feel this is an outcome that realises both near-term value for our mature brands and unlocks potential for City Chic, which is in a very niche sector of the market and has some great long-term growth potential,” Ms McDonald told the Financial Review.

​Sale proceeds will be used to strengthen Speciality’s balance sheet, fund store and digital growth and expansion into new categories and possibly enable the company, which has $50 million in franking credits, to resume paying franked dividends.

City Chic is expected to earn about $20 million (EBITDA) this year on sales of about $140 million – 37 per cent online – from 110 stores in Australia and New Zealand and a rapidly growing drop-ship and online business in North America and Europe.

Takeover target

Speciality Fashion chief executive Daniel Bracken, who took the helm in February from Gary Perlstein, dismissed concerns the deal would leave the company, once one of Australia’s largest specialty clothing retailers, with a single sub-scale brand.

“City Chic is the market leader in womens plus-size in Australia, it has a relatively new store footprint … and it is the market leader in online penetration, with 37 per cent of sales online,” Mr Bracken, who will hand the reins to City Chic general manager Phil Ryan this year.

“We have a strong and growing wholesale business principally through an online channel in the US market, we’re starting relationships in the UK and Germany in the online space and we have an under-penetrated physical market in Australia and New Zealand, so there are many levers for growth for this business,” he said.

Minority shareholders said Speciality Fashion was likely to become a takeover target, pointing to the fact Anchorage Capital Partners made a binding $100 million offer last month for the City Chic and Autograph brands and Mr Perlstein and former chairman Geoff Levy offered $75 million for the two brands.

“Someone has already made a binding offer for those assets for $100 million,” said one shareholder, who declined to be named.

“We’re not going to sell at a low-ball price but if someone is willing to pay a premium for control we’d have to consider that.”

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