Eric Watson’s plan to merge his New Zealand-based lingerie maker and retailer Bendon with New York-headquartered Naked Brand would provide a lifeline for the unprofitable company, which is on notice to maintain stockholder equity or risk losing its Nasdaq listing.
Nasdaq warned Naked Brand in September that it wasn’t in compliance with listing rules when stockholder equity dropped below US$2.5 million, the US underwear maker said in its third-quarter update. Losing the listing would make it more difficult for investors to trade the shares and “could also result in negative publicity and could also make it more difficult for us to raise additional capital”, it said.
Immediately after announcing the Bendon deal last week, Naked Brand flagged plans to raise almost US$2 million selling shares at US$1.04 apiece “to provide working capital for general corporate purposes and to support Naked’s ongoing operations through the estimated timeframe to completion of its proposed merger with Bendon”.
As of 31 October, Naked Brand had US$44,365 in cash, having burned through US$4.8 million in the first nine months of its financial year. Its ability to continue as a going concern was tagged as uncertain with the company yet to achieve profitable operations, incurring a loss of US$8.2 million on net sales of US$1.3 million in the nine months ended 31 October, with accumulated deficits of US$54.6 million.
Bendon would be using Naked Brand as a listing vehicle in the US, given its annual sales are almost 60 times greater than those of its target and the New Zealand-based manufacturer’s shareholders would end up owning 94 percent of the enlarged company. Bendon had annual sales of NZ$144 million in the 2016 financial year. The companies touted the benefits of a merger being Bendon’s immediate access to US capital markets, Naked Brand’s ability to leverage Bendon’s distribution channels, and cutting duplicated supply chain and administrative costs.
Naked Brand acknowledged its cash position was a risk to the business and that it would need to raise additional capital to fund its operations and aspirations to expand.
“Financings, including future equity investments, if obtained, may be on terms that are dilutive to our stockholders, and the prices at which new investors would be willing to purchase our securities may be lower than the price at which you purchase your shares,” the company said.
The merger, which requires approval from Naked Brand’s existing shareholders, has met with initial favour by the market. Naked Brand’s shares soared 63 percent to US$1.70 on Friday in the US, the highest close since September last year.
Bendon shareholders would be issued 118.8 million shares in the merged company, worth almost US$202 million at the closing price. Watson’s Pacific Retail Group bought the underwear-maker in 2002 for $1.90 a share, valuing Bendon at $58.7 million.
The companies have only signed a letter of intent to pursue the merger, with a view to putting it to Naked Brand shareholders in the first quarter. Under a penalty clause, Naked Brand will issue 2.5 million shares to Bendon if the deal falls through.
BusinessDesk
