Deckers Outdoor Potential M&A: From Rumor To Reality

Deckers Outdoor Corp DECK, the parent company behind various shoe brands including UGG, joins other fashion icons including Kate Spade & Co KATE in exploring strategic alternatives.

Deckers announced after Tuesday's market close that its board of directors began a strategic review process and is seeking alternatives, which may include a sale of itself. Investors may not necessarily be surprised by the announcement, as rumors that the company hired bankers to explore a sale surfaced on Feb. 17.

Also, Red Mountain Capital, an activist investor and owner of around 3.3 percent of the entire company, sent a letter to Deckers' board in late March, imploring the company to explore a sale.

Jefferies Crunches The Numbers

Randal Konik of Jefferies commented in a research report there is no guarantee any review process results. However, there are many funds with footwear and apparel exposure with cash to invest that could be used to accelerate and enhance Deckers' sales.

According to Konik, Deckers' stock is trading at 7.2x on 2018 EBITDA, which represents a slight premium to the three-year EV/EBITDA average multiple of 6.5x. When factoring in other recent M&A deals in the footwear space, a 9.25x purchase multiple "could be reasonable" and implies a price of $69 per share, or approximately 17 percent from current levels.

Bottom line, the analyst believes Deckers is attractive for an acquirer (ranging from a private fund to a global apparel or fashion icon giant) because:

1. The high-quality UGG brand has little direct competition.
2. The HOKA brand is rapidly growing.
3. Margin expansion initiatives have been put in place.
4. The company's international strategy is now unfolding.

Shares remain Buy rated with an unchained $60 price target.

At last check, the stock was up 3.85 percent at $61 in Wednesday's pre-market session.

Related Links:

25 Stocks Moving In Wednesday's Pre-Market Session

Why Skechers Has 15 Percent Upside Before Earnings ________ Image Credit: By Petrab1 - Own work, CC BY-SA 4.0, via Wikimedia Commons