EUR 850.00 For Business Accounts Only

Morningstar | Anta Announces Plan to Acquire Amer Sports; Shares Look Attractive

Narrow-moat Anta has announced an indicative nonbinding proposal to acquire Amer Sports (AMEAS.HE), a Finland-based sporting goods conglomerate, for EUR 40 per share. We think the plan makes strategic sense, increasing Anta’s exposure to the sporting equipment space and allowing management to use its expertise on sourcing and retail distribution (especially in China) to achieve sales and supply-chain cost synergies. The proposed cash deal for EUR 4.7 billion implies transaction multiples of 1.7 and 17 times Amer’s fiscal 2017 revenue and EBITDA, respectively. Anta’s buyout offer amounts to a 39% premium to the price of Amer shares before the announcement. If it proceeds, the acquisition will bring Amer’s value to roughly HKD 42.4 billion. Given that Anta will likely end up with around a 50% stake, this would account for around 23% of Anta’s market capitalization. Assuming no synergies, Anta’s share of Amer’s operating profit would represent approximately 13% of the group’s combined total in 2018. We are maintaining our fair value estimate on Anta for now, but will revisit it once more information becomes available.

Amer Sports is known as the maker of Wilson tennis rackets, Arc’teryx outdoor gear, Solomon hiking shoes, and 10 other brands of sports equipment products. We think Anta’s proposed buyout demonstrates Anta’s continued strategy of picking up brands with a minimal presence in China at the time of the acquisitions. Despite 29% compounded annual growth for its sales in China over the past five years, less than 5% of Amer’s revenue came from the country in 2017. If the acquisition is successful, we believe Anta will position Amer’s brands to convey premium quality to Chinese consumers, thus boosting sales in the country. More importantly, the acquisition of Amer will create synergies on both the revenue and cost fronts. We believe Anta’s know-how in manufacturing and distribution will cut down production costs while lifting Amer’s brand awareness in China, leading to higher returns for shareholders.

We also recognize that Amer’s core business falls under sports equipment, which is outside of Anta’s comfort zone (apparel and footwear). While it might take years for Anta to integrate Amer, leading to a near-term contraction in margins, we think investors should look past the short-term uncertainty and focus on the outlook of the integrated business in years to come. As we mentioned in our special report “It Is Time to Up the Anta,” the Chinese sportswear market is set to boom over the next 10 years as disposable income rises and sports participation grows. The acquisition of Amer will put Anta in a better position to benefit from strong demand for a variety of sporting goods.

Moreover, Anta’s proposed bid is contingent upon at least 90% of Amer’s shareholder approval. We think shareholders will more likely than not approve the deal, given that the attractive proposed offer is at a 39% premium to Amer’s preannouncement share price. There are no other bidders for Amer at the moment, and we do not anticipate much regulatory pushback.

On the financing side, even though it will be working with FountainVest (private equity firm based in China) to carry out the proposed acquisition, Anta will be the majority owner of Amer Sports. Assuming Anta is taking a 50% stake in Amer, we estimate that the company will pick up a total of HKD 13 billion in debt to finance the purchase. This should not be an issue for a company that was at 6% gearing and a HKD 9 billion net cash position at the end of June 2018. Management estimates that the interest rate for the bank loans will be between 3% and 4%, which should be sufficiently covered by current cash flows.