Retailer's float has Aussies dreaming

Kathmandu plans 70 new stores in Australasia including 18 additional outlets in New Zealand. Photo / Richard Robinson

Outdoor clothing and equipment retailer Kathmandu looks set to acquire a stronger Australian tinge following its initial public offer, with early indications of greater interest from institutional investors there than from their local counterparts.

Market sources also say the Christchurch-headquartered company may be approaching saturation in the New Zealand market and cite stronger growth opportunities in Australia.

After months of artfully stoked anticipation, details of Kathmandu's sharemarket float - where it will be listed on the NZX and Australia's ASX - were released yesterday. Owners GoldmanSachs JBWere's private equity arm and Quadrant Private Equity may exit completely, depending on market demand for their 197.4 million shares which will be offered at $2.01 to $2.32.

An initial offer to retail investors will be followed by an institutional bookbuild which will set the final price.

The offer is expected to gross $338.6 million to $457.2 million with the listed entity set to have a market capitalisation of $402 million to $463 million. The private equity consortium paid about $300 million for the business in 2006.

Chairman James Strong said the company had undergone a transformation over the past 3 years with significant investment in new stores, IT systems, distribution centres and staff.

The company has plans for 70 new stores in Australasia including 18 additional outlets in New Zealand.

Chief executive Peter Halkett said the company believed there were "further opportunities to drive earnings by improving existing store sales and margins through refurbishment, expansion of product offerings and further marketing initiatives".

A dual listing was the logical next step.

Guy Elliffe, head of equities at New Zealand's largest private sector fund manager AMP Capital Investors, said the offer was interesting, not least of all because of its size.

It is the largest local float since Vector's $592.6 million listing in 2005. As such it was likely to be included in the NZX-50 index, "so that's something that will demand investor attention".

Sales have risen from $151 million in the 2007 financial year to $216 million in the 2009 period. It is forecasting sales of $240 million in the 2010 period.

"It's probably somewhat differentiated from other private equity deals because it's actually grown well on the revenue line, and with the store openings is not a 'cost out' sort of a story which might be a little bit more interesting for investors."

The company was clearly profitable, had high margins and appeared to have a solid management team. While it was possibly approaching saturation in the New Zealand market, the outlook was "quite good" in Australia.

Elliffe wouldn't say whether AMP intended buying shares.

"We'll be looking at it pretty seriously over the next two or three weeks."

A fund manager at another large local institution said it would take time to go through the prospectus lodged yesterday.

However, he understood the offer had been targeted more at Australian institutions.

"Investment funds in New Zealand weren't prepared to put the company on an earnings multiple at its IPO the way the Aussies were," he said, speaking on condition of anonymity. "You've had the influence of what happened to Pumpkin Patch, it's been quite a rocky road and was heralded as a retail growth story but every business gets the speed wobbles now and again."

On the indicative price range, Kathmandu's 2010 forecast pre-tax earnings of $57.1 million represents a forward price to earnings ratio under the offer of 13 to 15 times.

"Kathmandu has got some very high margins and has been growing quite aggressively. That's not to say it won't continue but at 15 that's getting up there."

A source associated with the current owners said "most of the offer will end up going to Australia".

"New Zealand institutions will probably be a bit too slow to wake up and understand that it's a good deal. They're a little bit more tentative while the Aussies tend to be a bit more confident with this stuff."

Ahead of the offer, commentators have suggested investors would like to see how much "skin in the game" the existing owners retain in the company. Yesterday, a source at one of the owners said his firm would be "happy to retain whatever stake the market wants us to retain".

Strong said the bottom line would be how much demand for the stock there was from investors.

Goldman Sachs JBWere and Macquarie Group are the lead managers for the offer, which opens for retail investors on October 27, running until November 6. The bookbuild will take place between November 10 and 11 with the new shares making their debut on November 18.

NZ'S BIGGEST IPO SINCE 2005

* GoldmanSachs, JBWere's private equity arm and Quadrant Private Equity are to sell up to 99 per cent of Kathmandu in an initial public offer raising between $338.6 million and $457.2 million.
* 197.4 million shares will be offered at $2.01 to $2.32.
* It is the biggest IPO on the NZX since Vector raised $592.6 million in 2005.
* Kathmandu will have net debt of $70 million after the IPO.
* Management, who now hold 2 per cent, are expected to end up with about 1.3 per cent of the company.
* The company was acquired by its current owners from founder Jan Cameron in 2006 for about $300 million.