Kitwave Takeover

Removal of Wonder Stocks status

Kitwave is no longer a Wonder Stock, the following explains the rationale.

Last year, Kitwave Group featured on this Substack as a potential multi-bagger. It appeared to be a business with the defensive strengths of a national wholesaler and the growth engine of a disciplined buy-and-build strategy. This week, news broke that OEP Capital launched a 295p per share cash bid for the company. A 33% premium to the undisturbed price might satisfy some investors, but a closer look at the timing reveals an offer that is fundamentally opportunistic. In our view, it fails to reflect the true value of the business.

The timing of this bid is very convenient for the acquirer. Kitwave is currently navigating a cyclical low. Earnings are under pressure from temporary macroeconomic headwinds and the hard work of integrating major acquisitions. The 295p offer seeks to capitalise on trough earnings and a depressed multiple.

When Kitwave acquired Creed Foodservice in late 2024, the deal was struck at approximately 6.9x EBITDA. By contrast, this bid values the entire enlarged group at a level that looks lower than the benchmarks management used for their own expansion. Recommending an exit now suggests a willingness to hand over future synergies to private equity just as the integration is finishing.

Shareholders should also note that the headline 295p figure is not as solid as it seems. The offer includes a punitive dividend leakage clause. This means any dividends authorised or paid before the deal completes will be deducted from the 295p cash price. For long-term investors, the effective price is reduced by the value they were already entitled to receive.

While the board has recommended the bid, it is difficult to see how this maximises shareholder value. We believe a fair price for Kitwave is north of 400p when you consider its scale and the earnings power of the Creed business. The decision to recommend 295p raises serious questions about the motivations of the management team. To be blunt, we are deeply unimpressed. When a board recommends an offer that undervalues a company during a temporary dip, it suggests their interests are no longer aligned with the minority shareholders.

We are not alone in this view. We received a letter from Livio Arpagaus of the Swiss investment firm Quantex AG. As a long-term shareholder, he shares our disappointment:

Dear board members and management team of Kitwave,

We are long-term shareholders and are writing you regarding the take-over bid of OEP Capital. We are pleased to see, that we are not the only ones who think your company is undervalued. However, we would like to voice our disagreement over the price. At 295p/share your current FCF-Yield on equity is still in the double-digits, an unusually high yield for a firm with low cyclicality. After doing our own analysis, our estimate for a conservatively calculated fair price for Kitwave would be at least 450p/share.

We hope, you reconsider accepting the too low bid.

Best regards,

Livio Arpagaus, Quantex AG

As long-term investors, we do not invest for short-term spikes in share price. We invest for the compounding of capital over many years. While the market price has jumped, the loss of the long-term return profile is a negative result for those who saw the potential in this business.

If this deal goes ahead, Kitwave will be delisted and will no longer be a viable investment on the public market. If the deal fails, we are left with a management team that tried to sell the company at a trough valuation. A vital part of our process is finding well-run businesses where management acts in the interest of shareholders. Because this does not look to be the case here, Kitwave is no longer a Wonder Stock.