Is City Chic worth $3.85 per share?

We examine Morgan Stanley’s current view on the omni-channel retailer.

City Chic share price falls on failed Catherines acquisition

Like many listed companies, City Chic (CCX) has traded strongly off the lows it recorded in March – with its share price rising a staggering 339% from its 52-week low.

The stock had continued to move higher more recently – as excitement around the potential acquisition of the assets of US-based, plus-sized fashion brand Catherines – captivated the attention of investors.

To complete that acquisition, in July City Chic raised some $111.1 million in fresh capital – made up of a $80 million placement and a $31.1 million (upsized) share purchase plan (SPP).

The company, at the time noted that it had been 'selected as the Stalking Horse Bidder and signed an asset purchase agreement for the eCommerce assets of Catherines.'

Unfortunately, on Thursday the company announced that it had been outbid as part of the auction process for the assets of Catherines. The winning bid came in at $US$40.8 million, significantly ahead of City Chic's undisclosed bid, its consideration offer of US$16.0 million and well ahead of the company’s estimates of Catherines’ assets fair value.

In response to this News, City's CEO and MD, Phil Ryan said:

'Although it was disappointing not to win the assets at auction, we have a very good understanding of the plus size market and the value of the assets, and we did not want to overpay.'

The market’s response to this news was swift, with the stock being bid as much as 15.6% lower – to an intraday low of $2.85 per share – before recovering some of those losses before the close, finishing out Thursday’s session at $3.17 per share (-6.2%).

The stock continued to face selling pressure on Friday, down another 1.8%, to $3.11 per share, within the first two hours of trade.

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Is City Chic worth $3.85 per share?

Looking at how a number of key analysts responded to this news: Morgan Stanley (MS) described City's unsuccessful bid as 'a surprise', while retaining its Overweight rating on the stock and a $3.85 price target.

Ultimately, the investment bank highlighted some positives from the failed bidding process, including flagging management’s capital discipline, its validation of the value of the plus-size space and noting that the company has a number of organic growth pathways.

On the other hand, it was noted that the failed bid also potentially implies a more difficult mergers & acquisitions landscape, with it also being suggested that ‘Management may have been distracted on this transaction.’

As with MS, Citibank analysts argued that the failed acquisition potentially highlights that competition in the mergers & acquisitions space may be heating up, saying:

‘We incorporate $0.60 per share in our target price for acquisitions, but assume the company will now pay 8x EV/EBITDA, not 4x as we had previously assumed.’

Overall, as a result of this news, Citi downgraded their price target on CCX, from $3.40 to $3.20 per share but retained their Neutral rating.

‘The company trades on a high PE ratio and has had a weaker gross margin result in the past year, which may make future growth more challenging.’


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