Chargeurs’ first significant acquisition looks to tick all the right boxes: strategically perfect, better use of capital and giving a fresh twist to its hitherto low growth business, Fashion Technologies. The 2019 EPS impact is a 15% upgrade.

Chargeurs SA opens up its wallet at last and buys for $66m (EV) an $80m sales business that dovetails nicely with its existing Fashion Technologies’ operations.

The deal should complete by Q4 18 and is earnings enhancing from day 1. Fashion Technologies’ sales should hit €200m annually with an underlying EBIT seen at €15m, above current EBIT margins of the division.

The acquired business, PCC, is US-based but with 90% of its revenues in Asia. PCC appears to complement the original interlining business of Fashion Technologies by adding new territories but, above all, adding a large service component as its stock in trade. This amounts to being selected as the “prime” contact by a given brand to ensure the timely supply of the various inputs to the actual manufacturers (usually a motley lot). Brand designers indeed rely on subcontractors with frequent issues of quality consistency.

There is much to like in this significant transaction. Here is a long list:

  • It confirms that the group is sticking to its word of adding to its businesses, managing growth as opposed to rotating away from supposedly dud assets as a traditional holding company would. We like that.
  • The PCC acquisition is about shifting business models and top-line synergies by adding a service dimension that reflects on the quick changes of the apparel industry: fast fashion, just in time, strong brands with a worldwide reach. By servicing, rather than just supplying, Chargeurs moves in the right direction, which has been already addressed in other divisions (Technical Substrates and Protective Film).
  • PCC addresses industry segments (sportswear, underwear) which are a clear addition to its historically more traditional client base.
  • The geographical spread of the firm, already pretty exceptional for a small industrial conglomerate, is even more anchored in Asia post this deal.
  • The price appears to be attractive at 7.5x EBITDA, reflecting management’s keen attention on how it deploys its growth.
  • The good use of cheap financing that Chargeurs kept as so much dry ammunition for well thought out acquisitions is a mechanical plus.

The primary impact is mechanically to replace an idle cost of overfinancing by income generating assets. This is quite effective with a 15% uptick to 2019 EPS, the first full year of consolidation of PCC. Then there is the extra growth promises of these complementary assets.

This is not allowed for, for the time being. This transaction also contributes to a partial rebalancing of the group with a lesser dependence on the so far remarkable run of Protective Films which accounts for 2/3rds of the group’s value. We also take as a positive the ability of the management to balance its growth act carefully. In short, excellent news.

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