PPR is beginning to create a broader lifestyle group around Puma with the announcement of a merger agreement under which a dedicated subsidiary of the French group will make a cash tender offer for Volcom, the American brand of surf, skate and snowboard clothing and accessories. Indicating that other acquisitions may follow, PPR is maintaining the objective of reaching an annual turnover of €5 billion in sport & lifestyle.
The acquisition was announced the day before Volcom reported a 39 percent drop in net income for the first quarter ended March 31, down to $4.6 million, in spite of a 13 percent increase in revenues to $87.1 million. The gross margin slipped by 4.24 percentage points to a still relatively high level of 50.0 percent. Operating profits fell by 36 percent to $6.98 million.
Sales increased by 4 percent in the U.S. as well as in Europe, at least in terms of U.S. dollars, but operating income fell in both territories – by 67 percent and by 25 percent, respectively. Volcom's sports eyewear brand, Electric, raised sales by 23 percent, but its operating income contribution declined by 55 percent. Volcom's operations in Australia, which were previously licensed out, generated a $26,000 loss on sales of nearly $5.2 million.
The purchase price of $24.50 a share offered by PPR for Volcom is a 37 percent premium over the average stock exchange price of the company in the past three months, valuing it at $607.5 million including assumption of debt, and $516.1 million in terms of enterprise value.
There is no earn-out clause for Volcom's management, but still, PPR is dishing out a lot of money, considering that Volcom had Ebitda of $37 million and net profit of $22.3 million on revenues of $323.2 million in 2010. Out of the total turnover, $54.3 million or 70 percent of the total was generated in the U.S., $12.8 million in Europe, $5.1 million in Australia and $6.4 through its own brand of sunglasses, Electric.
Back in 2007, Volcom had an Ebit margin of 20 percent, and it was even higher in the previous year, before its acquisition of the distribution in Europe. Higher operating costs and the economic crisis depressed its margins subsequently. On the other hand, Volcom's revenues have been growing at an average compound rate of 12 percent in the past five years. In 2010, when Volcom took over the distribution in Australia, its consolidated revenues grew by 15.2 percent.
Jean-François Palus, financial director of PPR, said in a conference call that the acquisition would become accretive to the group's earnings as of next year. He pointed to several synergies that should help accelerate sales growth at Volcom and increase margins to historical levels:
- Volcom will save sourcing costs by bypassing sourcing agents and tapping into Puma's sourcing and logistic platform.
- The PPR group will also help Volcom in media buying, hedging and real estate development.
- Volcom will expand its product range to include a full-fledged footwear collection, banking on advice from Puma's product development team and its sourcing capabilities, but the timing of the launch is uncertain. Shoes and other accessories currently represent only 10 percent of sales. There are plans to develop Volcom's offering of snow wear, but none for snow equipment.
- The girls' segment, which currently represents less than 20 percent of Volcom's sales, will be expanded.
- Volcom will increase margins by opening more single-brand stores in the U.S., Europe and Asia, and it will further develop its e-commerce operations in the U.S. and take them to Europe and Asia.
_ While the sales forces will remain separate, Puma's market knowledge should help Volcom to increase its presence in Europe and to expand into new markets such as Brazil, China and other Asian countries other than Japan.
Richard Woolcott, who is now just over 45 years old, and his team will continue to run Volcom, a company that he founded 20 years ago out of his passion for snowboarding. He will report to Jochen Zeitz, who is leaving as chief executive of Puma to run PPR's sport & lifestyle group, and ultimately to François Henri Pinault, chairman and CEO of PPR, and to Palus. The company will be managed separately from Puma, while mutualizing its back-office functions. Volcom's price positioning and its general strategies will be maintained, with PPR providing some advice without making any big changes.
There was never any question of developing Puma into the action sports segment. While PPR acquired Cobra Golf last year through Puma, which is now co-distributing Cobra products in some markets, it was felt that Volcom should not be acquired through Puma because it belongs to a different market segment. There will be no joint distribution of Puma and Volcom products, at least in an initial phase.
Volcom's board of directors has unanimously recommended that the company's shareholders tender their shares to PPR. Certain directors and officers, who jointly own 14.4 percent of the capital, have agreed to tender all their shares in the transaction, which should be completed in the third quarter of this year if everything goes well and there is no counterbid. PPR plans to finance the takeover through existing credit lines.
