This Lululemon Takeover Chatter Actually Makes Sense

Source: lululemon athletica.

When analysts speculated last month that lululemon athletica  could be a takeover target for apparel giant VF Corp. , I balked at the idea. But this time it's different.

Now, a single investor has me raising my eyebrows. And as a long-term-oriented shareholder myself, I'm a little worried he might actually succeed.

Why VF won't bite
But before we get to that, let's recap why last month's speculation of a VF takeover didn't add up.

To be clear, I agree shares of Lululemon looked cheap then. But the analysts' suggested acquisition price of $50 per share only represented a meager 12% premium to Lululemon's already beaten-down price. And even then, such a deal would value Lululemon at a whopping $7.3 billion -- an enormous sum even for the $27 billion VF to shell out for a single brand, even one with historically hefty margins like Lululemon. For perspective, VF is currently comprised of no less than two dozen distinct brands, including Wrangler, The North Face, Vans, and Timberland.

...but Chip Wilson might
So what makes me think this single investor has a greater chance of acquiring Lululemon than a multibillion-dollar corporation? 

Lululemon co-founder Chip Wilson might be mulling a takeover bid. Photo source: Wikipedia Commons.

Love him or hate him, it helps that he's Lululemon's co-founder and former chairman, Chip Wilson. And on Sunday, The Wall Street Journal reported that Wilson has enlisted the help of Goldman Sachs to not only explore options to shake up Lululemon's board -- two members of which we already knew he disapproved of leading into its latest earnings report two weeks ago -- but also to potentially partner with a private-equity firm to secure a buyout. And considering Wilson already holds a 27% stake in Lululemon, the latter is a very real possibility.

Don't get me wrong. Though I wholeheartedly side with Wilson's previously stated sentiment that Lululemon should be focusing solely on long-term results, that doesn't mean I think he should exert his influence through a takeover bid of the company.

At the same time, I also wouldn't blame him for trying. The outspoken entrepreneur can't be happy, after all, about being forced from his position as nonexecutive chairman last December, following the latest in a series of off-color comments which -- to put it kindly -- didn't do Lululemon any favors in building rapport with consumers.

And given its current lull in growth, Lululemon currently trades at a reasonable 3.4 times trailing-12-month sales and 20 times next year's estimated earnings, respectively. By comparison, its seemingly unstoppable athletic apparel competitor Under Armour currently commands a premium of five times last year's sales and 50 times next year's expected earnings. Heck, even Nike trades for 26 times trailing earnings, all with a market cap 10 times the size of Lululemon's.

But unlike its peers, Lululemon is struggling to correct supply chain and quality assurance issues, while also attempting to prove to investors it can appeal to more than just yoga enthusiasts over the long haul. In the end, though -- and with the caveat that I certainly don't enjoy the same insight into its board as Wilson -- I still want to insist that's where Lululemon's promising new CEO, Laurent Potdevin, comes in.

Potdevin, for his part, has already outlined an inspiring plan to build up Lululemon's foundation this year, which should in theory set it up for years of sustainable growth going forward. Lululemon's board has also unsurprisingly backed up that plan. This early in the story, then, I think it's fair to say Lululemon could do without the distraction of an outspoken co-founder potentially upsetting those plans.

Moreover, with Lululemon stock having fallen more than 30% so far this year, you can also bet there are plenty of investors who would be resistant to any proposed deal at prices that could possibly represent an attractive value to any reasonable private equity firm. In the end, this might just be Wilson posturing to improve his position. But as long as Lululemon stock remains depressed, I wouldn't be the least bit surprised if he makes a play.

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The article This Lululemon Takeover Chatter Actually Makes Sense originally appeared on

Steve Symington owns shares of lululemon athletica and Under Armour. The Motley Fool recommends Goldman Sachs, lululemon athletica, Nike, and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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