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Shareholder Active Private Equity, which sold Evans Cycles in 2015, said to be talking to investment banks about upmarket cycle clothing firm

Rapha’s owners are looking to appoint an investment bank to handle a prospective sale of the upmarket cycle clothing business founded by Simon Mottram and others in 2004, reports Sky News.

The business is currently backed by Active Private Equity, which has already successfully exited its investment in one cycling business, Evans Cycles, in a £100 million deal in 2015.

Sky News says that it is not known what valuation would be put on Rapha, nor how strong the chances are that a deal would actually take place. Neither the company nor Active Private Equity would comment.

In November last year, it seemed that Rapha was set to be acquired by L Catterton, the private equity firm 40 per cent owned by luxury goods powerhouse LVMH.

> Louis Vuitton owner LVMH reportedly in talks to buy Rapha

In December, the investment firm bought a controlling stake in the Italian bike brand, Pinarello, but things have gone quiet on the rumoured Rapha deal.

> Pinarello sold to private equity firm part owned by French luxury goods group LVMH, owner of Louis Vuitton

According to Leanluxe, which provides “Intelligence, analysis, and opinion on the world of modern luxury business,” the hold-up is likely to be due to problems associated with future control of the business.

It says that some shareholders in Rapha – whether part of the business at the start and no longer active, or former executives who have shares – are unwilling to give up their shareholdings and control.

They are reported to be looking for “a less intrusive process,” something that is unlikely to happen in the case of an LVMH-backed deal says the website, with the luxury goods firm tending to install its own management at the smaller businesses it acquires.

Leanluxe has also pointed out that Rapha is unusual for a business operating at the high end of the consumer goods market in that its margins are unusually slim – 2.25 per cent, based on pre-tax profit of £1.1 million on turnover of £48.8 million in 2015/16.

It believes that is due to growth in employee numbers, which grew six-fold to 306 since 2013, with payroll costs trebling, the expansion of the Rapha Cycle Club concept, which had 14 stores at the year-end, and manufacturing costs, which alone gobble up half the company’s turnover.

While L Catterton may be out of the picture, a potential sale to a financial investor is still a distinct possibility and whichever investment bank is appointed to explore Rapha’s options would identify private equity firms and others that might look to back the business during its next stage of growth.

As for potential trade buyers of Rapha?

Leanluxe mentions two businesses – one the Vancouver-based yogawear business Lululemon, which had turnover of $2.1 billion in 2015/16, the other the US-based sportswear firm Under Armour, which had turnover of $4 billion during the same period.

Under Armour now supplies the off-bike wear for Team Sky staff and riders, who from 2013-16 had worn Rapha, who also provided the team’s racing kit.

Rapha continues to act as clothing sponsor for UCI Women’s team Canyon-SRAM, whose roots lie in the former T-Mobile team which raced from 2012-14 as Specialized-Lululemon.

Born in Scotland, Simon moved to London aged seven and now lives in the Oxfordshire Cotswolds with his miniature schnauzer, Elodie. He fell in love with cycling one Saturday morning in 1994 while living in Italy when Milan-San Remo went past his front door. A daily cycle commuter in London back before riding to work started to boom, he's been news editor at road.cc since 2009. Handily for work, he speaks French and Italian. He doesn't get to ride his Colnago as often as he'd like, and freely admits he's much more adept at cooking than fettling with bikes.

19 comments

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davenportmb [75 posts] 9 months ago
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Hugely recognisable brand, excellent products, cashflow positive but suffering from cost inflation due to rapid expansion - sounds like a private equity buyer's dream.

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RobD [539 posts] 9 months ago
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I didn't realise Rapha's profit margin was that (relatively) small, I guess the sales growth needs to match up with their staffing and logistics growth recently.

I think a sale to another sportswear firm might be good, potential increases in purchasing power and economy of scale, without the demands for quick return on investment that would come from a private equity firm.

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Benjamin Nickolls [58 posts] 9 months ago
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> Sky News says that it is not known what valuation would be put on Rapha

Here are the accounts: https://beta.companieshouse.gov.uk/company/04849594/filing-history take a guess (mine is ~20m). 

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Nevis the cat [35 posts] 9 months ago
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Based on a quick squint of the 2015 accounts, the EBITDA is approx £2m. Add to that the directors' remumeration and it's circa £2.4m.  Previous year was £1m plus adjustments. difficult to say what the maintianable profit level should be without 2012 and 2011, and the full detailed accounts for each year. 

 

Hard to get any more exact without the details of the exceptionals etc, but it's the adjusted EBITDA buyers will be working from. 

 

 

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stenmeister [344 posts] 9 months ago
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Damn, I came here looking for some cycling news and ended up reading the Financial Times. 

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Huw Watkins [158 posts] 9 months ago
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Massive below the line investment in the brand must have put a substantial dent in the numbers.

For what is generally seen as a luxury brand in the sector, their price differential vs. the mean isn't what you expect to see in other luxury sectors e.g. fashion, watches .

They're also still very reliant on a limited number of core geographies.

 

 

 

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hsiaolc [367 posts] 9 months ago
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The reason for the low net profit is due to masssive expansion.  Turnover of £48M is impressive.  

I don't see the business from slowing down especially cycling is on the up and not down around the world. 

 

 

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TheDoctor [251 posts] 9 months ago
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Selling out to a bigger sports brand will inevitably mean quality will go down and prices go up. Can't see any positives in that!

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surly_by_name [551 posts] 9 months ago
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Research on F&L deals (admittedly from 2015; and numbers somewhat by those F&L brands with significant part of value in real estate) suggests an EV/EBITDA multiple of 11-15x.

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Anyone seen my ... [32 posts] 9 months ago
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Rapha's business model differentiates it from its competitors, and whilst it seems to work for its loyal customers, it's clearly very expensive to operate and that is undermining its attractiveness to buyers.  

Profit margins of 2.5% on clothing made in China is poor and verging on unsustainable - especially if the expansion doesn't yield decent profit.  It seems that  the tension in the business is that some shareholders want to keep Rapha CC, their exclusive retail outlets, no compromise on quality, high staff ratios and coffee shops - whereas a PE firm would probably keep one or two flagship stores, scap the club or charge more for it, and sell their stuff from any old bike shops - as do ALL their competitors.  I know which I prefer.  

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tritecommentbot [2268 posts] 9 months ago
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I think the profit margin is a red herring. Businesses are taxed on profit, not turnover, so they've more likely intentionally expanded aggressively so keep their profits low to avoid tax. Common practise. No business wants a big profit margin at the end of the tax year if they can help it which is why investors look at turnover, debt and assets, not profits, when they're looking at a buyout. 

Rapha could be in the red, year on year, and still be attractive. Many businesses are. 

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captain_slog [416 posts] 9 months ago
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Quote:

Rapha owners

I saw the headline and thought, 'That's me.'

But after reading the article I don't think it means people who bought a cut-price pair of merino city socks in the sale three and half years ago.

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Leviathan [2865 posts] 9 months ago
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Louis Vuitton print arm warmers.

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The Rake [76 posts] 9 months ago
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unconstituted wrote:

I think the profit margin is a red herring. Businesses are taxed on profit, not turnover, so they've more likely intentionally expanded aggressively so keep their profits low to avoid tax. Common practise. No business wants a big profit margin at the end of the tax year if they can help it which is why investors look at turnover, debt and assets, not profits, when they're looking at a buyout. 

Rapha could be in the red, year on year, and still be attractive. Many businesses are. 

yes and no to the above. If the underlying profit margin is only 2.5% then this shows a company - given the premium pricing - operating massively inefficiently, and at risk (given an element of costs will be fixed over a term) of downturn in sales. Not paying tax is fine, but if it also means not paying dividends to shareholders, there is no ability to expand or ride the rough times because there is no incentive to invest. This may appeal to the PE/turnaround sectors whose job it is to strip costs and maintain profit.

Companies may avoid tax by R&D, capital investment etc as this builds for the future, but no group company has a serious goal of break even in order to avoid tax. Much better to make 10% EBITDA and pay 17% tax on that 10% than a wee bit of tax on 2.5% EBITDA. Companies operating across many geographies aim for minimal profits, but in the regions with the highest tax bands. They actually make profit but seek ways to repatriate to low tax localities like Luxembourg or the Netherlands.

ultimately, investors look at cash flows - a healthy EBITDA points to healthy cash flows in a retail environment as  a large proportion of sales are made real time (i.e. Cash on exchange for goods rather than extended payment terms)

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Bob Wheeler CX [104 posts] 9 months ago
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"upmarket cycle clothing firm" lol

 

come on lidl, stock up on those cheap lights again please

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Yorkshire wallet [1568 posts] 9 months ago
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Rapha - heading to Sports Direct like other once-premium brands.

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rtw [35 posts] 9 months ago
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Yorkshire wallet wrote:

Rapha - heading to Sports Direct like other once-premium brands.

If Sports Direct buys a more upmarket business abroad and their stock, they might find themselves with brands which they are unable to re-order / have no interest in selling.

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CygnusX1 [630 posts] 9 months ago
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Nevis the cat wrote:

Based on a quick squint of the 2015 accounts, the EBITDA is approx £2m.

Damn you, Nevis, you made me google a financial acronym before 9:30am - that's far too much like work (I'm in IT at a bank). To save others the trouble, EBITDA = Earnings before interest, tax, depreciation and amortization.

 

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Jimmy Ray Will [815 posts] 9 months ago
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Sorry, but I don't believe the figures. 

50% of costs are on manufacturing/ Seriously? They are using the same materials (give or take) as every other manufacturer out there, and not using revolutionary production methods...

Then, their sale costs are, on the whole, at the top end of the market. 

I know roughly how much it costs to manufacture cycling clothing, and even if they were sprinkling magic fairy dust into the chamois, it would not equate to the numbers these presented figures /percentages suggest. 

Could this be a PR release from Rapha? 

If Rapha's margins are small, its because of expansion and marketing spend, not the raw cost of production.