November 19, 2018 / 3:01 AM / 23 days ago

Breakingviews - Anta deal would be a marathon not a sprint

The logo of Anta Sports is seen on its product during a news conference announcing the company's annual results in Hong Kong, China February 27, 2018. REUTERS/Bobby Yip

HONG KONG (Reuters Breakingviews) - Making a success of buying Finland’s Amer Sports would be a marathon not a sprint for Anta Sports Products. The Chinese suitor’s stock has suffered since it approached the owner of winter gear brands Salomon and Arc’teryx in September with a $5.3 billion cash offer. Shareholders may be worried about the high price and the prospect of initially lower margins and dividends, but the company’s experience with Fila suggests the deal could pay off.

At 40 euros a share, Anta and its partners – which may soon include Chinese internet giant Tencent, according to Bloomberg – would be paying an extra 40 percent, or 1.3 billion euros ($1.5 billion), over Amer’s undisturbed market value. To make that premium stack up requires almost 190 million euros in annual synergies, or 3 percent of the estimated combined revenue for the two companies this year, Breakingviews reckons. The median proportion promised from M&A is around half that, Boston Consulting Group has found.

Such benefits are hard to achieve, but Anta can point to its track record. Since buying Fila’s business in the People’s Republic in 2009, it will have grown revenue by nearly 100 times by the end of this year to over $1 billion, with an operating margin as high as 25 percent, according to Morningstar estimates. Anta has opened flagship stores and targeted younger customers, reviving a brand endorsed in the 1970s by tennis star Bjorn Börg.

Amer offers an opportunity to replicate that achievement. Only 5 percent of its sales were in China last year and 40 percent of its materials and production came from Europe and the Americas. That presumably would change under Anta. The 2022 Olympic Winter Games in Beijing are also getting locals jazzed about skiing and similar activities.

Assume Anta could grow Amer’s China sales by 35 percent a year, roughly half Fila’s estimated rate, and reach 18 percent operating profitability by 2022. That would generate about 85 million euros of earnings before interest and taxes, Breakingviews calculates. And if Amer’s revenue in the rest of the world kept growing at about 3 percent, but with a 13 percent EBIT margin, the uplift from the current rate would be worth an extra 120 million euros. Altogether, that would help justify the deal financially. It’s an uphill climb, but within reach.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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