M&A is often more than simply a means of quick growth. Sometimes the only way a company can expand itself into areas are to buy the ability to do so.
Samsonite International has long been a believer in the merits of buying what you can't build. The luggage maker's $1.8 billion acquisition of US rival Tumi is the latest example of this attitude.
On March 4, Hong Kong-listed Samsonite announced it had agreed to a $1.8 billion purchase of Tumi. In many ways, the acquisition was the culmination of an exceptionally long courtship. Chief executive Ramesh Tainwala said Samsonite has had its eye on Tumi for a very long time.
“To my memory this has been a dream target [for Samsonite] for at least 15 years,” he told FinanceAsia. “I've worked here 18 years and people have been pursuing Tumi for as long as I remember.”
The appeal is natural, according to Tainwala. “Samsonite is a strong brand in the middle $100 to $300 [sales value] point, and [Samsung-owned bag-maker] American Tourister is the $60 to $100 entry point price. But we know Tumi focuses on the $300 to $500 segment, the premium segment of the market. We've tried to get there in the past through multiple efforts, such as making some Samsonite brands more expensive. But we are so widely distribute that it was becoming a hindrance.”
In other words, Samsonite's brand is too commonplace for wealthy consumers wanting to make an impression. Tainwala admitted that even its attempts to add a more exclusive range, such as introducing Samsonite Black, hadn't really worked.
But Tumi fills this niche. Its carry-on suitcases typically retail at around $460 to $600 but can rise as high as $1,200. For wealthy individuals and business travellers flying within Asia and beyond, the quality and high cost of its bags makes them appealing.
But according to Kyle Francis Gendreau, chief financial officer of Samsonite, Tumi had hit a size trap, lacking the capabilities to truly take it to the next level.
“They've come off the glory days of their IPO [in 2012], and while their business was performing well they haven't done a great job offering forward guidance for the street, which put their share price under pressure for the past 12 months,” Gendreau told FinanceAsia. “And while they've had plans to expand into Asia and Europe they've not had the ability to do it as well as they'd like. Plus, our persistence has taken us to where we are. I think we played it well and if you ask the other side they feel it's a good deal too.”
Tumi is about one quarter the size of Samsonite, having sold $547.66 million of products in 2015, and turning a net profit of $63 million. Samsonite's global sales for the first half of 2015 (it has not yet released full-year figures) were $1.2 billion, 16.6% higher than the same period of 2014, while adjusted net income was $102.1 million, up 7.2%.
Samsonite is confident its bigger distribution and agents' network will enable it to help Tumi penetrate wealthier travellers in many Asian markets. Indeed, this is a big reason behind the purchase.
“We are thinking Asia, Europe and then North America in terms of what the acquisition offers from a growth perspective,” he told FinanceAsia. “[Buying Tumi] is meant to optimize our position in Asia. There is a natural momentum in this region, the travel industry growing faster and this gives us another tool in our kit to benefit from that,” he said.
He noted that acquiring the heavily North America-focused Tumi will take Samsonite's sales to about 40% from North America, while reducing Asia's contribution from 40% today to 30%, with Europe and Latin America comprising the rest. However, he anticipates Asia returning to 40% of total sales over the coming five years as Tumi better penetrates markets such as Japan and Korea, in particular, utilising Samsonite's superior distribution capabilities.
“The focus initially [on growing sales in Asia] will be on Japan and Korea; they move faster,” said Gendreau.
Samsonite must be confident of these plans, given that it paid a full value to buy Tumi. It offered $26.75 a share, roughly 33% more than Tumi's closing share price on March 2. The amount is also 13.6 times Tumi's 2015 forward ebitda, a pretty full valuation.
The market has received the news of the acquisition well. Samsonite's share price rose 1.27% to close at HK$24 at the end of March 4.
Digestion required
Gendreau was philosophical about Samsonite having paid over the market odds to secure Tumi.
“Valuation is an art and a dance over a long period of time,” he said, when asked about why the company paid a relatively high valuation. “When we looked at the multiples and cost synergies at play, we saw this was a business that's very similar to ours, and it nicely overlaps. There are large opportunities, and soft synergies in terms of driving growth in markets other than North America.”
Samsonite is paying for Tumi by adding debt to its debt-free balance sheet. The company has arranged a $500 million revolving credit facility and a further $1.4 billion through a mixture of term loan A and B facilities. Morgan Stanley is arranging the financing as well as advising Samsonite on the M&A, and it was joined on the funding by HSBC, Bank of Tokyo Mitsubishi, National Association and SunTrust Bank.
Gendreau declined to estimate the cost of the loan tranches, saying it was too early at this stage. Adding the debt to the combined company will offer it a combined debt to ebitda level of 3.4 times, he estimated. That's not bad, considering Samsonite throws off a decent amount of cash.
Even for the M&A-happy Samsonite, the purchase of Tumi will take time to digest. “We will slow down and do less acquiring as we want to correctly integrate it,” said Gendreau. “It doesn't mean we won't do the occasional nip and tuck, and make small acquisitions. But we are focused on this now.”
He added that the company aimed to keep growing its core business at 10% a year, in addition to the acquisition of Tumi. “We will open more Tumi retail stores but wholesale stores will open at the same or faster pace,” Gendreau said. He noted Tumi had about 2,000 global sales outlets in total. Samsonite intends to double this, in line with its stated plan to double its total revenue to $4.7 billion by 2020.
The acquisition of Tumi has helped Samsonite reach customers it could not easily manage to do alone, and could help it grow faster in Asia, the fastest-growing market for travel. Those appear sensible reasons for paying up a little to get the deal done.
