Will V.F. Corp Acquire Quicksilver?

V.F. Corp has made acquisitions a vital part of its growth strategy. Will Quicksilver be its next target?

Jul 10, 2014 at 10:14AM

V.F. Corp (NYSE:VFC) has historically relied on M&A activity to fuel growth. The strategy appears to be working so far as the company recently raised its Timberland guidance and expects sales to grow 12% in 2014, as opposed to the 10% growth the company guided for back in February.

Now that the Timberland acquisition is running on cruise control, investors should expect V.F. Corp to shop around for a new deal.

V.F. Corp's $17 billion in revenue by fiscal 2017 appears to be feasible, but further acquisitions may be necessary to achieve its goals.

V.F. Corp's long-term guidance assumes a more than 10% compounded annual revenue growth through 2017, of which 8% will be organic growth and 2% growth from acquisitions. As of the end of the first quarter, V.F. Corp reported $321.67 million in cash on hand and $1.25 billion revolving credit (valid until 2016), implying that an acquisition could be forthcoming

During V.F. Corp's first quarter conference call, the company's Chief Financial Officer Bob Shearer made it perfectly the company is actively pursuing an acquisition. When Laurent Vasilescu of Macquarie Securities asked management to explain its M&A plans, Shearer answered:

And I will deal with the acquisition question. And how we think about acquisition targets, and we think about it a lot, and yes, we have a list. But we think about brands that are complementary to our brand portfolio that help us reach customers/consumers. We are not engaged with at this point. Or to build us out in spaces that we are close to being in but we don't have enough share of that space.

We are agnostic as to geography, we would buy a business anywhere in the world if it was complementary to our brand portfolio. And the size aspect given our current size bigger deals, fewer bigger deals would be better for us to do.

What about Quicksilver?
Quicksilver (NYSE:ZQK) reported very poor second quarter results on June 2, with revenue and earnings per share falling short of analyst expectations.

Quicksilver reported that its Americas revenue fell 18% year-over-year with declining sales also reported internationally. Additionally, management guided to a similar sales trend in the second half of 2014 with revenues declining in North America and internationally.

Quicksilver also said that its 2016 financial goal of improving its EBITDA by $150 million has been pushed forward to 2017.

As shares of Quicksilver were absolutely hammered on the trading day following earnings and lost more than 40% of their value, the company could be an attractive acquisition target. In fact, V.F. Corp may be interested in Quicksilver following its unsuccessful bid for Billabong.

Despite a poor second quarter, Quicksilver still has a strong action sports brand that compliments V.F. Corp's existing portfolio. Perhaps the most attractive aspect to Quicksilver's portfolio is the Roxy brand that should benefit from a strong industry-wide performance. Companies like Dick's Sporting Goods reported significant strength in sales of apparel and footwear to kids and women, which bodes well for the Roxy brand.

Bottom line
Acquisitions will play a vital role in V.F. Corp's growth strategy, and Quicksilver may appear to be an ideal fit. V.F. Corp has demonstrated an ability to acquire complimentary brands that fuel growth at reasonable prices.  V.F. Corp could easily finance an acquisition of Quicksilver with its cash on hand and available credit.

Back in 2011, V.F. Corp paid $2.3 billion for Timberland, implying a 1.3 times multiple on 2011 consensus revenue. The price tag on V.F. Corp's $775 acquisition of 7 For All Mankind represents an approximate 2.6 times multiple on 2007 annual sales.

The price tag to acquire Quicksilver would be north of $2 billion based on a 1.3 multiple of  2014's estimated $1.7 billion in sales. This may appear to be a steep price to pay, but consider Quicksilver's current market cap of around $620 million. A more realistic multiple of 0.9 times sales places a $1.53 billion price tag on a deal, implying an attractive premium for investors.

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