Lululemon Athletica Inc. may be getting too pricy for a takeover.
At least one analyst, Camilo Lyon of Canaccord Genuity, believes a leveraged buyout of Lululemon isn’t going to happen anytime soon.
Following the yoga apparel firm’s first-quarter profit drop and founder Chip Wilson’s failed attempt to shake up the company’s board, both last month, there has been market speculation that Lululemon might be ripe for a takeover. Rumblings that Wilson has tested the private equity waters haven’t helped cool the speculation.
Companies such as VF Corp. have been mentioned as a possible acquirer by some Wall Street analysts, mostly because of an expressed interest in the sector and also, in the case of VF, due to its proven ability to do substantial deals. VF’s chairman and chief executive officer Eric Wiseman has declined comment on market rumors.
Lyon believes that an “LBO appears a long way off.”
In a research note Tuesday, Lyon said, “In response to the continual news flow surrounding founder Chip Wilson’s exploratory exercise to take Lululemon private, we have updated our Lululemon LBO model. We conclude that for private equity to either go it alone or partner with Mr. Wilson on a buyout, the purchase price would need to approximate $35 a share (below where the stock is today) to generate an [investment rate of return] of 20 percent.”
Lyon, noting the company’s still-rich valuation of 22 times [price/earnings ratio] and 10 times [earnings before interest, taxes, depreciation and amortization], as well as a hefty market capitalization of $5.7 billion, “we see the probability of such a deal occurring at a premium to Lululemon’s current share price of $39.45 as very low.”
The analyst said taking Lululemon private at $45 a share, or an investor rate of return at 8 percent, “would require a large equity check that would account for approximately 50 percent of the transaction price,” which is far greater than the standard 30 percent equity contribution by private equity sponsors. Lyon concluded that even if the company’s founder rolled his 27 percent ownership stake into the deal, that would only help reduce the equity contribution required by private equity. Still an issue would be the deal price and what would constitute an acceptable investment rate of return.
Given that a deal above $35 a share doesn’t make sense when considering equity contribution and investment rate of return, Lyon has chosen to maintain his “hold” rating on Lululemon shares and a $42 a share price target.
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