When Rapha first announced plans to sell a good portion of its company to a new round of private investors, the race was on to see who could clinch the deal. It now appears that a private equity firm led by two grandsons of Walmart founder Sam Walton is the winner. Stewart and Tom Walton’s RZC Investments will pay some £200 million for the cycling brand.
Speculation is already mounting over the sale price being too high. Whether that’s true or not remains to be seen. More important right now is understanding why Rapha sold a majority share of their company to RZC. Selling a company should never be taken lightly, and it appears as though Rapha put a lot of thought into their decision.
The Need for Capital
It’s not unusual to see investors selling part of a company in order to raise cash. That’s exactly what has happened in the Rapha case. The company made it clear that they were looking for more capital to invest in their business when they first decided on the sale. For them, it is not a matter of whether the £200 million price tag is too high or not. The sale infuses Rapha with the capital it needs to move forward.
Cyclist magazine quoted Rapha founder and current boss Simon Mottram as saying: “to date we’ve grown with very little capital, we’ve traded our way to this position… the only thing that is constraining us is capital.”
Mottram’s assertion is easily seen in the company’s financials. Since Rapha’s founding, they have done a lot with very little. All the profits turned have been reinvested in the business, but growth has been limited because it has been fuelled entirely by reinvestment. An infusion of cash will help them expand further and faster without having to rely purely on profits to fuel growth.
RZC Investments Are Key
There is no way to know how much cash Rapha will actually see from the sale. But selling a company does not have to be all about upfront cash. In Rapha’s case, they have a reasonable expectation that RZC will make considerable capital investments in the business in order to guarantee a healthy ROI when it comes time to pull out. That’s the way investment capital works.
RZC and the Walton brothers are very likely to sink substantial amounts of cash into the business in the next 24 to 36 months. Those investments will probably be targeted toward capital improvements, R&D, and marketing. Some of the money might even be used to develop programmes that will make Rapha as competitive in the cycling market as Walmart is in big box retail.
Selling part of their company to raise cash is not a bad move by Rapha. If the sale proves to be the shot in the arm they needed to realise growth goals, the Â£200 million spent by RZC will be nothing compared to the returns it generates.
Cyclist – http://www.cyclist.co.uk/news/3321/has-rapha-been-overpriced-at-200m-we-look-deeper-into-the-sale
By Tim Luscombe.
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