What’s Birkenstock’s IPO About?

The story of the company 2 years older than the USA itself.

The Birkenstock Public Fundraising is about the company’s journey from modest beginnings to becoming a renowned brand. What is Birkenstock’s unique selling point? Why does it matter, many will ask? After all, it’s just a commodity product. Yet, it’s more than that. Just like Nike, it has succeeded in branding, although more impressively, it has succeeded at branding without having a catchphrase such as, “Just Do It” – a phrase in its original meaning was much darker than what it became known for. It was the phrase used by the prisoner who was dealt a death sentence. He just wanted to be done with it – hence “Just Do It”.

Birkenstock’s problem statement can be defined as follows: “People suffer from foot pain caused by uncomfortable sandals, so we’ll give you footwear that enables high comfort and therefore better quality of life.”

Where It All Begun

Its history goes back, in fact, way back. It’s 2 years older than the United States, founded in 1774. Started by Johann Adam Birkenstock in Langen Bergheim, a Frankfurt suburb, quickly gained local fame for making comfortable shoes for the vibrant working community of one of the oldest German cities.

Birkenstock stayed as an SME for a long time, until the ’60s when Counterculture and happiness became a thing, and it started to be recommended by many orthopedics as a go-to shoe for those seeking comfort. Yeah, it kinda discriminates against the flatfooted, with its extremely arched design, but I guess something’s gotta give. It was such an important part of the counterculture that even the great Steve Jobs wore Birks, if he wore a shoe at all. The funny thing is that, earlier in the year somebody bought that very pair for around $220,000. A rather emotional purchase.

Fast forward to 2021, after numerous attempts by outsiders to get into the company, the Louis Vuitton-backed private equity firm, L Catterton, was successful at acquiring it. At the time it was considered a staggering price of $4.3B.

Forwarding another 2 years, on October 2023, we are on the day of the Birkenstock IPO, with a target valuation of $9.3M on a fully diluted basis, over 2.1x MOIC in 2 years. Not unheard of, but not a bad result either, especially considering the times, one of the toughest IPO periods in a decade.

After A Long Wait, The IPO & The Valuation

The company is shooting to raise $1.5B in the NYSE, and the capital is going to be used as follows: $500M for paying down debt. The rest is the cash to the PE.

The roadshow for the IPO must’ve been a success, at least, although it was boosted by the PE backer, LVMH by placing an order for $325M of the total IPO. The World’s largest sovereign wealth fund, from Norway, will pick up another 20%. I expected at least 90% of the IPO would be subscribed before the first trade occurs, leaving room for $150M to be freely picked up by the retailer.

As far as the valuation of the business, as mentioned, it’s expected to be $9.3B. Let’s examine that.

Birk has had CAGR revenue growth of 18% for the last 10 years, which accelerated since the PE takeover. It has a debt of $1.9B but once netted with cash that’s $1.6B.

With an average of 37% FCF margin, and revenue growth of 12% for the next 5 years and 8% for the 5 years after that, I arrive at the total FCF of $8.4B. but that needs to be discounted by the hurdle rate, for taking a risk to invest in a single firm, which I estimate is at around 9%. That brings the 10-year FCF estimate to a present value of $5.5B.

I calculate the terminal value via GGM to be around $5.5B as well, with an LT growth of 4%.

To add all the components up: 10-year FCF of 5.5B. Terminal Value of 5.5B. Net Debt of -1.6B

It gives a net equity value of $9.4B, which is surprisingly in line with what the market expects.

The only thing it reveals to me is that investors expect an average of 10% earnings growth for the next 10 years, and if you think that the revenue growth of the last few years can be replicated, this IPO might be worth following.

Prepared by the Argo Advisory Insights Team

Argo Advisory | Published: October 2023

Sources:

FT | SEC Filings