Welspun India Ltd acquiring brands to market scale

Welspun has acquired 85% of Christy, a leading towel brand in UK, which will provide Welspun a foothold in UK's premium home textile market and access to other premium retailers in USA and Europe. The acquisition will entail an initial cash flow of Rs 1000 mn, which will be funded 60% through debt and balance through internal accruals. We believe this acquisition is one of the few slated brand acquisitions that Welspun is planning in its key markets to emerge as a global home textiles player, wherein it is not only a low cost manufacturer but also a marketer and manager of brands.

Acquisition of Christy ?o:p>

Welspun India has acquired an 85% interest in UK's leading towel brand Christy, valuing it at an EV of GBP 15.6 mn (Rs 1326mn). The acquisition will entail a cash outflow of Rs 1000 mn, 60% debt and balance equity. Christy is the world's oldest towel manufacturer and UK's leading towel brand with an annual turnover of $ 65 mn (~Rs 300 mn). Apart from manufacturing and selling its own brand, Christy also manufactures and imports a wide range of own labels products for leading retailers. Across the UK, Christy has established long standing relationships with premium retail stores and outside the UK, Christy is available in leading retailers across the world in Hong Kong, Germany and USA.

A step to leverage its global scale capacities ?o:p>

With this acquisition, Welspun will not only gain access to the European market and proximity to clients but also Christy's retail presence, design skills, and strong brand. Welspun over the next 3-4 years aims to leverage Christy's relationships to sell Welspun towels, bed linen and other home furnishings in the European as well as other markets such as USA, Australia. At present Welspun has presence in several US value retailers such as Costco and Wal-Mart, while Christy will provide access to premium retailer Bloomingdale's.

For becoming a global home textiles player

Post completion of its ongoing expansions at the end of FY07, Welspun will be attaining a sizeable capacity across segments i.e. yarn, toweling and sheeting, which will make it the 4th largest terry towel and 5th/6th largest integrated bed sheeting player in the world. Once done with investing in capacities, Welspun has planned to invest in markets so as to move from a home textile manufacturer to marketer and brand manager of textiles. Over the next 3-4 years, it aims to achieve 20% of its turnover from own/acquired/licensed brands, which presently contribute to 3% of its revenues.

Acquisition ?mechanics

Welspun India has acquired 85% stake in CHT Holdings Limited, the ultimate holding company of the UK's leading towel brand Christy, valuing Christy at GBP 15.6 mn (Rs 1326mn). The existing Christy Management team will continue to own the remaining 15% of the Christy issued share capital. From 1 April 2009, Welspun and the Christy Management shall be able to exercise a put/call option, calculated by a formula based upon FY08 and FY09 EBITDA, to buy/sell the 15% equity interest retained by the existing Christy management. The valuation of Christy as per the company is 5.5x its EBITDA. The initial cash outflow at the time of acquisition will be Rs 1000 mn, of which Rs 600 mn will be funded through debt and the balance through internal accruals. Welspun (stand-alone) reported Rs 826 mn worth of liquid investments and Rs 810 of cash on its books for FY06.

Pay-back

Welspun believes Christy's business to generate 20-25% of RoCE, which should translate to a payback period of 4-5 years. Margins in this business at present are 9-10%, which will augment the margins of the manufacturing operations once the Welspun manufacturing capacities are streamlined to produce premium end products to rationalize certain of Christy's sourcing requirements.

What does this acquisition add to Welspun?

?Brand management and retail management skills to the manufacturing capabilities of Welspun, which will enable it to grow from a manufacturer to a brand owner and marketer of brands. Welspun has recently started its retailing in India and licensed/launched its brands in India and USA - Tommy Hilfiger (India) and Nautica and Umbra (US & Canadian)

?Manufacturing capabilities to be augmented through the transfer of technology/product development skills from Christy to manufacture and manage premium end products.

?Christy's premium position and vast UK market share (~75%) will augment Welspun's product range and improve its access to premium UK market. Christy's relationships with most of the UK supermarkets and premium US retailers such as Bloomingdales will bring volume growth to Welspun and provide it an opportunity to leverage the mid end segments.

?Most importantly this acquisition will bring Welspun closer to its customers, which will enable it to service its UK customers more effectively and leverage direct "FOB business."

?Sourcing skills of Christy to improve sourcing capabilities of Welspun as latter increases it's sourcing for marketing its brands in its key markets. Christy has its supply chain streamlined over the years with large proportion of its finished products being fully sourced. Christy expects 70% of its finished goods to be fully sourced in 2006-07.

?Welspun expects to add Rs 1666 mn and Rs 20 mn to revenues and PAT in 2007. However, as the capabilities get integrated and synergies get realized, Welspun expects margins from Christy revenues to increase in 2008 and 2009. Though revenues are expected to grow at a CAGR of 17% over 2007/09 to Rs 2266 mn in 2009, PAT is expected to grow at 95% over the same period. Incremental EPS from this should be Rs 0.87 and Rs 0.99 in 2008 and 2009, respectively

Analyst Meet Update Welspun India Ltd

Christy ?an innovative towel producer and the only towel brand in UK

Christy is a 150 year old towel manufacturer, the first one to manufacture towels and then on has many pioneering concepts to its name in the terry towels business. Christy invented the first loom to mechanically weave what remains today the basis of the modern towel and is the sole supplier of the world famous Wimbledon Championship tennis towel. Apart from towels other key products of Christy's are bed linen, bath robes and other bath accessories. Christy epitomizes quality with many home textiles players asking for Christy finish in the products, signifying its premium standing in the industry. The company has a manufacturing facility in Manchester and apart from that outsources nearly 55% of its finished products from countries such as Egypt, Turkey and India. Christy has a market share of 17% in the entire towels market in UK, but within its premium product segment has a 22% market share.

Christy growing through product, formats and geography additions

Christy has been growing consistently over the last 5-6 years with addition of product lines, retailing formats and geographies. Except for a dip in sales in 2004-05, sales growth has been in the range of 5-10%. Revenues grew by 9% in 2005-06 to $65 mn, which are expected to grow at a same pace to $71 mn in 2006-07. Within the UK, Christy has a strong retail presence of its own and operates 98 concessions, principally with House of Fraser and Debenhams, plus 22 stand-alone Christy branded stores. Apart from manufacturing and retailing its own brand, Christy also manufactures and imports a wide range of own labels products for leading retailers. Across the UK, Christy has established long standing relationships with premium retail stores including Marks and Spencer, John Lewis, House of Fraser, Selfridges and Debenhams.

Sales break up by type of outlet, 2005 %

Christy Branded Wholesale - Towels 36%

Private Label Wholesale 31%

Christy Concessions - Towels 20%

Christy Concessions - Bedlinen 3%

Christy Outlet Stores 7%

Christy Branded Wholesale - Bedlinen 3%

Source: Company, Emkay Research

Sales break up by geography, 2005

Outside the UK, Christy is available in leading retailers across the world such as Lane Crawford in Hong Kong, Karstadt in Germany and Bloomingdales in the USA. Furthermore, the Christy brand has been successfully extended into bed linen and bathrobes and has recently entered into licensing agreements in Australia and the USA

Source from : http://news.moneycontrol.com/india/news/