Deal focus: CVC gets intimate with A Bathing Ape

You don't have to spend too much time on the sidewalks of Asia's more affluent cities to understand why CVC Capital Partners was interested in acquiring ubiquitous Japanese streetwear brand A Bathing Ape (BAPE). Even basic t-shirts bearing the enigmatic logo are typically priced in the hundreds of dollars, but the targeted youth market instinctively knows that looking cool is priceless.

The challenge was structural: carving out the brand from a larger, brick and mortar-heavy retail organization without triggering a takeover process for unwanted assets. BAPE's Hong Kong-listed parent, I.T, has 600 stores across Greater China, a portfolio of associated car parks and warehouses, and 10 less commercially attractive clothing brands.

CVC offered to acquire I.T in April at HK$3 per share, a 55% premium to the previous closing price. This valued the company at $460 million, although most of that compensation was taken up by the founder, Sham Kar Wai, who rolled over his holding into the acquisition entity. CVC took an approximately 36% stake by buying out other shareholders.

The private equity firm immediately increased its position to 49% as part of a restructure that refinanced group debt into BAPE and separated the brand from the other I.T operations, which Sham now solely controls. The deal was formally completed last week, with CVC announcing "co-control" of BAPE and gearing up plans to expand both online and geographically.

"This is not selling off a bit of a company after privatization. The whole thesis from day one was to split it out into two separate businesses concurrent with the privatization, which is unique," says a source close to the situation. "I can't think of any other take-privates in Hong Kong like that. It was quite complicated and required a lot of work."

During the 2020 financial year, I.T saw a profit of HK$444.1 million ($57.2 million) swing to a loss of HK$745.8 million, citing pandemic-related hardships, including 27 store closures across Hong Kong and Macau. Group revenue declined 13% to HK$7.7 billion, while EBITDA rose 58% to HK$1.6 billion. In contrast, non-BAPE operations generated HK$454.5 million in EBITDA.

"The banks needed to see the two structures completely different and separate, and I.T couldn't do that by themselves," the source said. "They needed a lot of help in terms of structure. CVC brings the reputation, the ability to sell this to the banks. I.T really needed to do it this way to have a fresh start and let the banks look at the brands business, which is much stronger."

The key to the deal, however, is more street than structure. BAPE, unlike traditional fashion labels, relies predominantly on word-of-mouth and social media for its reputation and audience outreach. This allows it to operate on a relatively asset-light basis.

CVC was doubtlessly tracking this aspect of the streetwear thesis last November, when The Carlyle Group exited US skateboarding lifestyle brand Supreme in a $2.1 billion deal. Carlyle reportedly acquired a 50% stake in the company for $500 million in 2017.

"High-end labels spend huge amounts of money on advertising and shops in the most expensive shopping districts and shopping centers. These brands are not targeting those people," the source adds. "They want street cred, so they go about it a different way."

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• Topics
• North Asia
• Greater China
• Buyouts
• Consumer
• Japan
• Hong Kong (China)
• CVC Capital Partners