What we have here is a lot of money chasing a lot of assets. At least that's what I'm left to believe after seeing the bidding wars breaking out these days. Yesterday, it was a Goldman Sachs (NYSE:GS) coalition, or maybe GE (NYSE:GE), trying to get hold of British airports operator BAA.
Today, I'm taking a closer look at the one-upmanship regarding clothing designer and brand licensor Mossimo (NASDAQ:MOSS), which is being courted by others in the biz. What looked like a done deal with IconixBrand Group (NASDAQ:ICON) was upset by a company that I hold, Cherokee (NASDAQ:CHKE).
Cherokee, which has been involved with Mossimo in the past -- both in introducing the firm to Target (NYSE:TGT) and in court cases about payment for that finder's fee -- submitted an unsolicited, $8.50 per-share bid yesterday, which Chairman and CEO Robert Margolis described as "superior" for Mossimo shareholders.
On the face of things, I'd have to agree. Cherokee is offering $6 cash plus $2.50 in Cherokee shares (at the share price on which the agreement would be signed, or $40 per share). That's not only 13.3% more than Iconix is offering, it's a bigger chunk of cash. Moreover, Cherokee's pristine balance sheets will make borrowing the $135 million needed a breeze.
Getting back to the idea that I introduced up at the top: When I first saw these headlines, I thought I was looking at yet another example of overanxious moola looking desperately for a place to roost. There's a lot of that going around these days. That's why I had to take a peek at Mossimo's bottom line, because I have to be honest, I wasn't so sure I could nod my head at this one. Just so you know the baggage I carry, I like Cherokee for the big free cash flow, which is paid out to me in dividends. And I don't like the idea that servicing $135 million in debt might hack away a portion of my income.
When I tried to put a value on Mossimo's cash flow, I first liked what I saw. But then I noticed the latest full-year free cash flow of nearly $10 million is juiced by more than $3 million worth of accrued bonuses. When I backed up to a more normalized cash flow, $8.50 a share looked like 25% too much to me.
But that estimate didn't take into account any savings that a combined entity might realize, and to take a look at the books, I see plenty of potential. Mossimo's selling, general, and administrative expenses run about 65% of revenues these days. Cherokee checks in at around 27%. Trim away some fat there, and I can easily see this acquisition paying for itself pretty quickly.
The trouble, of course, is that I can't see exactly how that will happen; we can only guess. Whether we like it or not, we're basically along for the ride here. At least, in the case of Cherokee, management has seemed to work hard to make the company pay off for shareholders. Here's one who will continue to hold, and to hope that the Mossimo offer comes through.
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Seth Jayson is all for a decent acquisition, as long as it comes at the right price. At the time of publication, he had shares of Cherokee, but no position in any other firm mentioned. View his stock holdings and Fool profile here. Fool rules are here.
