Key Numbers
£70m price for Naked Wines, £50m in cash and £20m contingent consideration in shares. Naked Wines has revenue of £74m, 40% YoY growth, and EBITDA loss of £3.3m. 300k customers currently. Naked Wine CEO, Rowan Gormley, appointed to lead the new Group. Majestic expects £21m of profit this year. FY15 dividend withheld.
Analysis
Very big announcement here. This acquisition and the installation of an outside CEO really shakes things up. Naked Wines is clearly a very different company and this will change the direction of the business in a big way.
First, let's look at where Majestic Wine is right now. Everyone knows that the company has been struggling a bit. L4L sales have been disappointing, not terrible but below expectations. The ambitious store-opening plan has buoyed the top-line but none of this growth has been converted into profit.
The guidance given in this release suggests that profits will be down 8% in the full year, an extremely disappointing performance for a company that looked so promising a few years ago.
So what has been causing this poor performance? The poor trading over Christmas was triggered by increased promotional activity. Management invested 50bps of gross margin which probably went some way to causing the drop in full year profits. Through the year, the company has also invested in technology and infrastructure. I am not exactly clear on what the purpose of all this was, I see new CRM capabilities so presumably the company was investing with a few to growing the online business. Either way, these "investments" haven't resulted in higher profits.
I don't think any of these faults are fatal but the timing on was clearly very unfortunate. Majestic was investing heavily then L4Ls weakened then Christmas went bad. I was never particularly convinced that Majestic was going to live up to expectations but this doesn't look like a business in crisis either.
That is why I am having trouble understanding the acquisition: the whole deal seems to scream fire in the engine room.
The first worrying point, of course, is the price. £70m is a hell of a lot for a company losing £3.3m/year at the EBITDA level. What exactly is Majestic getting for its £70m?
We can take a look at the financials that Naked Wines filed at Companies House. It looks like the business actually generated a profit in 2013, net £1.1m. 2014 was obviously a year of investment, management expect the deal to…
