Destination Maternity Pursues Mothercare for Base in U.K.Paul Jarvis and Celeste Perri
Destination Maternity Corp. said Mothercare Plc rejected its two offers for the U.K. retailer as the owner of the “A Pea in the Pod” clothing brand seeks to become the latest U.S. company to domicile overseas.
Mothercare declined to engage with Destination on the proposals, the latest of which implies a valuation of about 266 million pounds ($456 million), the Philadelphia-based designer and retailer of maternity apparel said in a statement today. The U.K. company said the price offered is insufficient. Its shares rose as much as 17 percent in London.
A merger would represent the latest in a series of cross-border transactions proposed by U.S. companies. AbbVie Inc.’s $46.5 billion bid for specialty drugmaker Shire Plc, which has U.S. offices but is domiciled in Dublin for tax reasons, and Medtronic Inc.’s $42.9 billion acquisition of Dublin-based Covidien Plc are among the most recent deals.
“For Destination Maternity, Mothercare would give them international revenue streams, and the tax position will be beneficial, which are clear advantages,” said John Stevenson, an analyst at Peel Hunt in London. Still, the offer “probably isn’t fair value and clearly doesn’t fully recognize the underlying value of the international business,” he said.
Destination Maternity didn’t mention potential tax benefits in its statement. The U.S. company has guided to a tax rate of 38 percent for 2014, compared with a standard rate of U.K. corporation tax that’s due to drop to 20 percent next year.
For Destination, a combination with Watford, England-based Mothercare would be about more than tax advantages, according to Bryan Roberts, an analyst at researcher Kantar Retail in London.
“The proposal contains a succession of extremely sound points on the logic of combining the two businesses, Roberts said by e-mail. ‘‘Incorporating a credible maternity offer into the Mothercare proposition will drive traffic and also capture a mum earlier in pregnancy.’’
Adding Mothercare, which has more than 1,000 stores worldwide offering products for babies and young children, would create ‘‘a highly attractive opportunity to accelerate the growth and development of both businesses and generate substantial value for our respective shareholders,’’ Ed Krell, chief executive officer of Destination, said in the statement.
The offer ‘‘significantly undervalued’’ Mothercare and failed to address ‘‘material concerns regarding the deliverability of value,’’ the U.K. company said in response. The proposed deal contains ‘‘significant transaction execution risks given the proposed transaction structure and tax inversion,’’ Mothercare said.
Destination said its latest proposal, made on June 1, was for a combination of the two companies under a new U.K. holding company that would be listed in the U.S. The U.S. company issued the statement in response to press speculation.
Mothercare shareholders would each get 300 pence a share, comprising 230 pence in cash and shares in the new holding company valued at 70 pence, Destination said. The shares advanced 12 percent to 260 pence as of 11:18 a.m. in London, giving the retailer a market value of about 230 million pounds.
‘‘Maybe 70 pence of highly leveraged U.S. equity is not that attractive to U.K. shareholders, so the 230 pence cash is the main offer,’’ Mike Dennis, an analyst at Cantor Fitzgerald in London, said in a note.
Destination is being advised by Bank of America Merrill Lynch and Skadden, Arps, Slate, Meagher & Flom LLP.