Standard & Poor’s indicated that it may upgrade its debt ratings for the Authentic Brands Group (ABG) based on the amount that it will raise through its planned public offering. The credit rating agency said it expects ABG to use the proceeds to repay a portion of its debt, which amounted to $1.8 billion as of March 31.
That would reduce the company’s debt/Ebitda ratio, which has been estimated by S&P at 4.8 times on an adjusted basis for the 12 months ended March 31. In turn, this would provide ABG with additional flexibility in financing new acquisitions such as the possible takeover of Reebok in combination with Wolverine Worldwide, which may cost a total of at least $1.2 billion.
“We could raise our ratings if Authentic Brands repays a material amount of debt, continues its strong operating performance, and we believe management’s financial policies will allow it to sustain leverage of less than 5x over the long term,” S&P added.
So far, ABG has only said that it plans to raise $100 million through an IPO on the New York Stock Exchange, without indicating yet the timing, how many shares it wants to sell or their target price. S&P believes that its current shareholders will want to control 70 percent of the equity.
A closer look at the prospectus filed by ABG for its IPO shows that gains of $200.9 million from joint ventures based on the equity method allowed it to book a net profit of $278.1 million in the first quarter of this year. This compares with a net profit of only $54.2 million in the same quarter of 2020 after losses of $35.9 million from its joint ventures. Adjusted Ebitda rose to $120.5 million in the quarter from $94.7 million. Revenues went up by 33 percent to $160.1 million.
In fact, ABG only has minority stakes in the joint ventures that operate the core business of brands such as Spyder, Volcom, Tapout, Nautica, Aéropostale, Lucky Brand, Brooks Brothers, Eddie Bauer or Forever 21. In the “active” sports sector, which accounted for 10 percent of its revenues last year, it controls other brands such as Airwalk, Prince, Tretorn or Vision Streetwear. Fashion and footwear brands such as Barneys New York, Juicy Couture or Nine West represented 31 percent and 25 percent of the turnover, respectively.
Like other brand management groups, ABG handles brand strategy and marketing and derives its revenues from royalties on licenses signed for the brands in its portfolio. Organic growth and acquisitions allowed it to book a compound average growth rate of 30 percent in the last five years. Its revenues rose to $488.9 million in 2020 from $331.0 million in 2018, thanks in part to an expansion in the number of brands from 28 to 35 over the period.
Due to the Covid pandemic, however, ABG’s revenues grew by only 2 percent in 2020. Net earnings jumped by 191 percent to $210.9 million from $72.5 million in 2019, when it took a non-recurring nine-figure loss on the sale of investments. Adjusted Ebitda increased by 6 percent to $373.3 million last year.
In filing its prospectus, ABG said it can count on future contracted minimum royalties of more than $2.6 billion, with more than $400 million due in 2021 as well as in 2022. At the retail level, its brands are generating annual sales of more than $14 billion, and ABG is estimating its total market opportunity at some $13 trillion at retail.
ABG has particularly strong opportunities for development outside North America, which represented 79 percent of its licensing revenues last year. A move in this direction was its recent establishment of an office in London for the EMEA region, headed up by Henry Stupp, the former CEO of Apex Global Brands (formerly called Cherokee Global Brands).