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Has Rapha been overpriced at £200m? We look deeper into the sale

Ollie Gill
22 Aug 2017

Business journalist Ollie Gill gets under the surface of the Rapha sale, a deal with a bit more to it than meets the eye

Little over two weeks ago Rapha announced it had concluded the hunt for fresh investment and unveiled the two scions of the Walmart dynasty as its new owners.

Steuart and Tom Walton, the grandsons of the founder of the US supermarket, picked up a majority stake through one of their investment funds called RZC.

But as with most private sales, the deal announcement was light on specifics.

Why?

It has been no secret that Rapha has been on the hunt for new backers for some time. But why did it need change?

Speaking shortly after the deal was announced Rapha’s founder and boss Simon Mottram explained: 'To date we’ve grown with very little capital, we’ve traded our way to this position.'

Catch a few minutes of Dragons’ Den and you’ll hear participants begging for 'investment capital'.

In a way, Rapha was stuck in a similar position. It has been reliant on the profits it makes each year to reinvest into business growth.

With the backing of the Walmart grandsons, plans for faster growth can be a reality.

Mottram said: 'The only thing that is constraining us is capital. We have over the next three to five years a really incredible set of initiatives in mind.'

How much cash investment Rapha receives remains to be seen. It is important to separate the value attributed to sale (reported as £200m), from the amount of money to be invested in growing the business.

However, the deep-pocketed Americans know that if they want to realise a decent return on the cash they’ve splashed, growth is paramount.

And to do that they need to put new money into the business.

Steuart Walton said: 'Our investment demonstrates our enthusiasm for its quality products, amazing community of cyclists and customers and its strong future.'

Meanwhile, having a bank that believes in – and supports – a business is also hugely important. Rapha will also be buoyed financially by the fact they recently swapped to a bank seemingly more inclined to offer more money for a longer term.

Up until March this year, the firm was dependent on a short-term loan of £8m that needed to paid back every year.

According to Rapha’s latest financial statements, it has swapped Barclays for British Cycling sponsor HSBC and is in the process of more than doubling its bank lending to £20m.

How does its valuation compare?

'There’s nobody there competing with us,' reckons Mottram. To be fair, he has a point. Rapha sells a wide array of products whether that is clothing, travel, events, membership or even marketing.

This makes finding a comparative company valuation very tricky.

Because they must disclose a lot more information, a publicly-listed company provides context.

Halfords’ publicly traded stock is currently worth £650m and it reckons around 30 per cent of its business comes from cycling.

A very rudimentary calculation suggests the sector is worth around £195m to its shareholders.

But Halfords dominates the cycling market in the UK. Its car and cycling operations stretch across 479 stores – for further context, this compares with 2,500 independent bike shops in the UK.

While a comparison between Rapha and Halfords is good for setting the scene, a direct association is flawed.

They operate at different ends of the market. One flogs bikes to the masses; the other sells cycling 'experiences' to the ever-growing few.

More context can be found by looking at the 2016 merger between Wiggle and Chain Reaction. The combined firm is reported to have sales of around £300m, this compares with Rapha’s most recent annual sales of £67m.

The merger valued the Chain Reaction part at £72m. Wiggle was bought in 2011 for £180m.

Returning to Halfords, another recent deal was its purchase of Tredz and Wheelies Direct last year.

The Welsh-based outfit’s annual sales are less than half of Rapha’s, some £32m. But Halfords paid £18.4m for the two businesses, considerably less than the Rapha figure making the headlines.

Did Rapha's new owners pay too much?

Despite cycling going from strength to strength in recent years, bankers’ eyebrows were raised at the reported £200m valuation of the business.

In the year to January 2017, Rapha’s £67m of sales resulted in earnings – or the firm’s bottom line – of £4.5m.

So if the price is to believed, that’s equivalent to over 44 years of current earnings.

Such ratios, or so-called earnings multiples, are the bread and butter to private equity funds. Each investment varies, but it’s fair to say they tend to get a little twitchy when such a multiple moves into double-digit territory.

North of 20 times and it is common to hear people talk of 'a real growth story'.

To be clear, the £200m valuation has not been officially confirmed. It is actually the reported figure of what rival bidders such as Louis Vuitton and Aston Martin investor InvestIndustrial were prepared to pay.

Mottram said he was 'blown away' by the amount of interest in the brand. With several bidders prepared to stump up big investments, there is an argument that Steuart and Tom Walton’s RZC Investments simply paid the going price.

So with the lack of comparables, whether RZC ended up overpaying can only be judged in the fullness of time.

But despite their riches, the Waltons will expect a return for their investment.

Stick or twist?

Rapha has some 25 shareholders, according to filings at Companies House. Given that all we know is that a 'majority' share has been sold it is hard to know which parties have sold their shares and which have not.

Active private equity – the former owners of Evans Cycles and current owners of the likes of Leon and Honest Burger – held just under 20 per cent of the shares pre-deal.

The largest shareholder, however, is listed as Rupert Rittson-Thomas, believed to be a member of the Fleming banking (and James Bond) dynasty.

Together with a secondary joint interest he owns just under a quarter of the company.

Other sizable shareholders include chief executive and founder Simon Mottram (12.6 per cent) and Rapha and former Evans Cycles chairman Nick Evans (8.2 per cent).

In the sale announcement it was confirmed Mottram had retained 'a significant part of his stake in the business'.

What next?

Specific plans are a closely guarded secret. But Mottram has committed to stick around for the foreseeable future.

He has also said the firm won’t be taking any large diversions from what they have done so far. Instead, it will be a matter of scaling up current operations and likely rolling out in new locations.

'They [the new owners] have bought into business because they believe in me and the team and the strategy and the vision that we have for the company,' Mottram said.

Meanwhile, Steuart Walton believes RZC’s investment supports 'Rapha’s strategic vision'.

He added: 'We’re excited to be part of this next chapter by bringing the best sport in the world to more people in more ways and places.'

One thing’s for sure, Mottram insists, we won’t be seeing Rapha clothing on sale in supermarkets such as US giant Walmart or UK arm Asda.

'That’s specifically off the table,' he said.

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