Rebel Goes

Sydney, Nov 9, 2006 (ABN Newswire) - Gerry Harvey's Harvey Norman is turning Rebel Sport loose by accepting a $4.60 a share (subject to no higher bids) for the sports goods group from Australian private equity group, Archer Capital.

The deal, which was widely tipped after Rebel asked for a trading halt on Monday, did disappoint some investors who believed newspaper hype that the deal would be done at $5 a share.

That left Harvey Norman shares a little unwanted, while there was no punting in Rebel because Harvey Norman has given Archer a six month option over 19.9 per cent of Rebel, allowing the equity group to put its foot on the chain. The deal values Rebel at $369 million, with Harvey Norman getting 53 per cent of that, or around $195 million (and a profit of around $143 million). Some investors reckon Harvey Norman will give that back to shareholders in some way of using up around $400 million in excess franking credits in HVN.

The real question to be answered here is whether Gerry Harvey and the rest of the insiders on the board need the franking credits because the company hasn't been generous with shareholders as it should have.

To allow $400 million in franking credits to grow unchecked on the balance sheet means a company has been a bit stingy with dividends; which HVN has been up to the last three years when capital gains in the share price slowed and income growth became a way out.

Archer Capital is an active private equity group: some of its previous deals have included being involved in Repco (since refloated to less than outstanding success); Emeco (a equipment hire group now listed); Paradise Foods (the country's second biggest biscuit maker); Sulo, (the Australasian operations of a waster disposal products group); RedPaper group (the old Edwards Dunlop and Carlter Holt paper merchant business); MCK (a buyout of the local arm of a British engineering group, now operating in plastics); Onesource (a New Zealand office products group); John West (the fish products group); Dome Coffees and Singature Security. Some of those are still held, some have been 'exited' like Repco, Dome and Singature.

Australian Geographic is another high profile holding while Amart All Sports is the investment of interest in this deal. Archer invested in this Queensland group in mid 2004 and then brought a second group operating outside of Queensland and NSW, in late 2005. That gave it a total of 56 stores.

Buying Rebel will make it by far the biggest sports retailer in the country.
There will be obvious merger and synergy benefits but probably some ACCC scrutiny since there's not much in the way of competition in sporting goods. For sportswear (shoes and clothing) there won't be any worries, so there should be little in the way of worries overall.

All that could destabilise the deal is another offer: from whom would be the obvious question.

Perhaps HVN were never seen as a seller of Rebel: it picked up the stake at around 86c average price and have held on as new management have patiently turned the business around, culminating with a very good 2006, helped by cricket and soccer booms: the first quarter to September also saw the strong growth continue.

Rebel Sport managing director Stephen Heath (a former HVN franchisee) said the transaction is an attractive option for Rebel shareholders.

"We believe it will be an attractive offer for shareholders," Mr Heath said yesterday."

"If the transaction occurs it will be an exciting development for the company, staff and our business partners."

Rebel has granted Archer a period of exclusivity to complete due diligence and put a binding offer to shareholders, secured by that option granted by HVN over 19.9 per cent of REB's shares.

Rebel lifted earnings 38 per cent rise in 2006 to a record $22 million and last month said sales rose 17.4 per cent to more than $91 million in the three months to the end of September.

Rebel shares ended 19c higher at $4.54 and HVN eased 5c to $3.72.

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