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by Cam Whiting
February 15, 2016
When bicycle trade website BikeBiz reported last week that Wolverhampton-based Wiggle was seeking to acquire its Northern Ireland rival Chain Reaction Cycles, it precipitated a flurry of near-indistinguishable reports across specialist and general media channels.
“Wiggle is on the verge of absorbing its main retail rival Chain Reaction Cycles. It’s said to be highly likely that the sale will go through next week,” wrote Executive Editor Carlton Reid on 12 February, adding “nobody at Wiggle or Chain Reaction will confirm a sale is on the cards.”
Such was the containment of information surrounding the alleged deal that no additional details bubbled to the surface in the 48 hours following Bikebiz’s report. Though Reid’s claim was based on information from anonymous “industry insiders” – often used as a proxy for speculation – BikeBiz is generally regarded as a credible source of industry news.
The official announcement came two days later on Friday.
“In the global online retailing market in which we operate, there is a compelling industrial logic for our two businesses to come together to become a stronger force,” said Wiggle CEO Stefan Barden, who joined the company in September 2013. “The combined business will offer all customers an extended range of brands and products, with Wiggle’s strength in tri-sports and road cycling complemented by Chain Reaction Cycles’ strength in mountain biking, BMX and road cycling too.
“The deal propels Wiggle faster towards its objective of building a global online champion and a major British export success story.”
“This is an exciting new chapter for the Chain Reaction Cycles brand,” added Chain Reaction Cycles’ managing director Chris Watson. “Since the business started in 1984, we’ve grown strongly from our mountain bike origins in Northern Ireland to meet the needs of more MTB, BMX and road cyclists across more countries. Coming together with Wiggle is a great way to continue that growth, as a global force in cycling and a leader in technology, e-commerce and innovation.”
So what does the merger mean? Before we get to that, we need to consider the history of the two companies.
Wiggle made an unlikely entry into cycling, beginning with a two-man team in December 1991 as Portsmouth-based software company Edge Technologies. Keen to invest in commercial property, Mitch Dall, one of Edge’s directors, made a move on decades-old local bike shop Butlers Cycles.
When Dall’s fellow director Simon Galley left in July 1998, almost one year passed before a new partner, and business name, materialised. Edge Technologies became ‘Wiggle Limited’ in May 1999, and Harvey Jones became the company’s second director alongside Dall. Initially, the pair sold everything from sunglasses to vibrators and accessories from the bike shop that Dall had agreed to keep running for a period of five years from when he purchased the building.
“Wiggle wasn’t founded by great corporate titans with lots of money,” explained then-CEO Humphrey Cobbold in a March 2012 interview with CyclingTips. “It was founded by two guys [Mitch Dall and Harvey Jones] in 1998/1999 who thought they’d sell things online. They weren’t really sure what they’d sell online but they thought this online selling was going to be interesting.
“They had some excess stock at the back of (Butlers Cycles) and so (Dall) tried putting that online and seeing if it sold, and it sold pretty well.”
Chain Reaction Cycles followed a much more conventional path. Husband and wife George and Janice Watson, both seasoned cyclists, opened Ballynure Cycles in 1984. A move to the larger neighbouring town of Ballyclare in 1989 necessitated a name change, thus ‘Chain Reaction Cycles’ came to life. Fifteen-year-old son Chris was already a regular helper in the shop, advising his parents on trends and steering the shop’s product line, resulting in a devoted following of eager fans who couldn’t get enough of the exotic US-centric range of mountain bikes which Chain Reaction Cycles specialised in.
After seeing numerous mail-order advertisements in bicycle magazines, Chris suggested his parents also evolve beyond the physical borders of their shop. The transition proved to be so successful that by 1998 the family was once again forced to move to a bigger premises – only this time, it was a dedicated warehouse. Chainreactioncycles.com was launched in late 1999.
Growth for both companies was rapid, though less spectacular than the trajectory that distinguished the dot-com boom of the previous decade. By 2005, their respective annual turnovers breached £10 million (AU$20 million).
“If your business isn’t growing then it’s stagnating. If it’s stagnating, someone else will come along and take it away from you,” said then-31-year old Chris Watson in a 2006 interview for the Ernst & Young Entrepreneur of the Year awards. “It’s nice for us to be able to fund and provide for the company itself through the profit and through the hard work of the people that are here, rather than to rely on outside businesses putting venture capital into it.
“If you allow someone else to invest in your business then you’re essentially working for them.”
Watson could very well have been referring to arch-rival Wiggle which, in the previous year, had taken the decision to get its first injection of private equity.
Dall was introduced to the concept of private equity by clothing retailer Tim Slade on the sidelines of a school football match. In 2000, Slade had selected ISIS Equity (now Livingbridge, having changed its name in November 2014 for obvious reasons) to invest into the Fat Face brand which he and business partner Jules Leaver co-founded seven years earlier. ISIS’ involvement saw Fat Face’s annual revenue grow from less than £10 million to £60 million (AU$120 million) in five years, at which time ISIS sold its share of the business to rival private equity firm Advent International.
With Slade’s words ringing in his ears, Dall placed a call with Mark Advani of ISIS Equity. “We met at (Wiggle’s) brand new and empty warehouse,” recalled Advani years later. “I remember thinking how proud he was of it and Mitch began to tell me about the business and their plans for the future.”
ISIS acquired a 42% stake in Wiggle for a cool £12.3 milion (AU$25 million) in July 2006, setting up Ensco 503 Ltd as the parent company. Dall, Jones, Paul Bolwell (who joined Wiggle in October 2002) and newly appointed Finance Director Andreas Panteli all become stakeholders, with Slade also investing.
Additional funding in hand, Wiggle quickly began upscaling its operations and focused on expanding its geographical reach. The company introduced multiple currencies and languages to its website in mid-2008, resulting in an immediate sugar hit from countries such as Australia (see video below) and Japan whose bicycle markets had not yet embraced e-commerce in any meaningful way.
CRC’s overseas revenue was already north of £5 million (AU$10 million) in 2008. Three of CRC’s management team – MD Chris Watson, Frank Warwick (purchasing) and Michael Cowan (e-commerce) – had also turned their attentions to the UK’s cycle wholesaling sector, purchasing MTB Distribution Ltd (now Hotlines Europe) in 2006 and, four years later, founding Decade Europe.
Until now, both Chain Reaction Cycles (CRC) and Wiggle had dabbled in several product categories. Some were adjacent to cycling, such as Run and Swim, and others less so. Wiggle toyed with Boat, CRC persisted with Motocross, and both intermittently sold Wintersports products. Wiggle had a dedicated Women’s menu from the beginning while CRC focused on ‘Boys Toyz’ (which, interestingly, was replaced with a dedicated Women’s category in June 2010).
By the end of 2008, Wiggle’s product portfolio had settled on Cycle, Run, Swim, Triathlon and Women’s categories. CRC’s business also relied heavily on Cycle and, to a lesser extent, Triathlon; it wouldn’t take long before motorcycle and snow categories were shed as the online rivalry with Wiggle escalated.
In March the following year, Mitch Dall called it a day and sold his 26% stake in the company he founded 10 years earlier. “The growth at Wiggle has been phenomenal,” he told The Telegraph two months later, “but I enjoyed the embryonic stage.” Jones would leave exactly one year later. At the midpoint of these milestones came the appointment of Cambridge University alumni Cobbold, who joined Wiggle as CEO and also became a stakeholder in parent Ensco 503.
If there was any animosity between CRC and Wiggle as they duelled for local and international market share, it wasn’t aired publicly. All of the visible fisticuffs occurred within the grounded bicycle industry, over which CRC’s and Wiggle’s growing presence cast a shadow; both companies’ international sales had by the end of 2010 exceeded 50% of total annual turnover.
Anecdotally, it had already become commonplace for some European distributors who had redundant or excess stock to dump their inventories onto either CRC or Wiggle. One story circulating at the industry exhibition Eurobike told of a UK distributor that sold its unwanted stock of premium road bike frames to Chain Reaction Cycles. Incensed at the prospect of being undermined by cross-border sales, another European distributor which sold the same brand in its own country, sold its unwanted stock to Wiggle. The ongoing jostling resulted in massive price deflation, with global price discrepancies proving baffling to consumers and frustrating to bicycle industry wholesalers and retailers alike.
Large players in the US market were also feeling threatened. “Chain Reaction and Wiggle aren’t winning in the high-end US marketplace because of a strategy – they’re winning by exploiting a market anomaly,“ wrote Brendan Quirk of US online retailer Competitive Cyclist in November 2011. “If manufacturers don’t shut down this UK-USA sales channel, they’re the ones that ultimately stand to lose the most.”
By 2011, the UK’s two most prominent cycling retailers had each surpassed £100 million (AU$200 million) in turnover by a considerable margin and were selling to customers in over 100 countries. Chain Reaction Cycles opened up a gleaming new Belfast-based retail store in October while Cobbold publicly floated the prospect of a Wiggle Initial Public Offering (IPO) in the same month.
Though the IPO never materialised – and still hasn’t despite discussions re-surfacing again in 2014 – a sale of Wiggle did, with ISIS divesting and PE firm Bridgepoint Europe picking up where ISIS had left off [sidenote: when Advent offloaded Fat Face in 2007, it was Bridgepoint that scooped it up]. The deal size was a staggering £180 million (AU$360 million), yielding an almost 70% Internal Rate of Return to ISIS’ clients.
To facilitate the Bridgepoint deal, a string of holding companies was set up. The entire issued share capital of Ensco 503 was acquired in December 2011 by Bridgepoint’s intriguingly named MAPIL Bidco – presumably, a play on the cycling acronym MAMIL – in Bridgepoint’s case, probably ‘Middle Age Professionals In Lycra’ (though this hasn’t been confirmed).
Recent years have seen mixed fortunes for both CRC and Wiggle. CRC’s revenues peaked at £155.5 million (AU$310 million) in 2012, fell in 2013 and rebounded to £153.3 (AU$306 million) in FY2014 (01.01 – 31.12.2014). Its gross profit margins, however, remained above 32% – at no time in the company’s history have they been below this.
Wiggle’s revenues passed CRC’s in FY2014/15 (02.02.2014 – 01.02.2015) with an all-time record of £179.2 million (AU$360 million), despite a strengthening British Pound eroding foreign earnings on currency translation. Gross profit margin meanwhile fell to 22%; the lowest recording of this important performance indicator.
Throughout its post-1999 trade history Chain Reaction Cycles has remained steadfastly self-funded, with only a modest overdraft facility from the Bank of Ireland; reflecting at least some important aspects of the sentiment voiced by Chris Watson in his 2006 E&Y interview hadn’t altered. CRC’s inventory levels have also recently been trimmed back; possibly signalling a leniency, if not a conscious effort, towards preparing for eventual merger or sale.
Conversely, Wiggle sits on a large debt burden. Its debt:profit ratio in 2014 was 82:1; the highest of all leading mid-market growth companies in the Sunday Times’ Top Track 250 league table published last year. Still, parent company Bridgepoint has been kicking some considerable goals. Its €1.05 billion (AU$2.1 billion) sale of international sports marketing firm Infront Sports & Media to Dalian Wanda in February 2015 was lauded, and it continues rollout of its UK-founded Pret A Manger restaurant chain. Another investment is Madrid-based Dorna SBK, the international sports management business that holds exclusive long-term rights to the MotoGP and World Superbike Championships.
Before Wiggle CEO Stefan Barden can take leadership of the new entity, the transaction needs to gain numerous regulatory approvals; the merger control process by the UK Competition and Markets Authority (CMA) is expected to take several months alone.
On the basis of present information, the proposed merger will not require oversight by the European Commission, based on the fact EU turnover for both CRC and Wiggle appears well short of the €250 million (AU$390 million) regulatory trigger point in Article 1 of the EC Merger Regulations (ECMR).
Absent of precedents for similarly sized deals in UK bicycle industry history – though the scope of CRC and Wiggle extends well beyond simply cycling – the 2007 acquisition of British sporting goods supplier Umbro by Nike might indicate some of the challenges that await the CMA.
Firstly, there is nothing even close to resembling perfect data on the UK sporting goods market. This was noted by the UK’s Office of Fair Trading (whose merger assessment function was taken over by the CMA from 01 April 2014) in its assessment of the proposed Nike-Umbro deal (which was ultimately approved), writing “there is no available data on shares of the supply of sports equipment.”
Secondly, Wiggle and Chain Reaction today offer many of the same brands (158 to be precise) on their respective websites. It will be a mammoth task for the CMA to assess the market size for each major segment and category within the UK sporting goods markets. Further, will a merger have an expansionary or dilutory market share impact on those brands?
Thirdly, but by no means finally, the numerous subsidiaries and related parties of CRC will also need to be taken into account, further complicating the assessment.
If the Competition and Markets Authority gives the proposed merger the green light, exactly how the two e-commerce majors adjust their existing operations to exist under the same roof remains a matter of considerable conjecture.
There is no doubt that Wiggle and CRC have already both performed extensive commercial and legal due diligence, meaning the framework of a three- to five-year vision is likely already ready to be implemented if, and when, the deal goes ahead.
In the background, supplier contracts will likely need to be re-negotiated and re-written, proprietary and diverse systems – for example, Enterprise Resource Planning (ERP) – will probably be integrated over time, but discussions pertaining to headcount are sensibly off the table, for now.
One immediate strategical advantage that Wiggle employed from the beginning was its name – it could be anything. The Chain Reaction Cycles brand, on the other hand, has inherently limited scope. This might result in Chain Reaction Cycles continuing in several phases: firstly, by divesting Run as a category, then by consolidating its brands. From there, it might continue as an entity alongside (at least in a front-end sense) Wiggle; be absorbed entirely; or possibly even manifest into physical retail and service outlets as a Wiggle subsidiary.
Of course, there are many other possible outcomes and a keen eye will be needed to stay across the visible and discrete operational changes that will occur in years to follow.
So how what impact might the merge have on consumers in markets such as Australia, Japan and the US? In the near-term, probably not much.
It could be reasonably expected that CRC and Wiggle might want to decrease their stocks further; so there are potentially more clearance sales to look forward to. Under-performing brands might be cast aside entirely as part of these efforts. Depending on how the merger is explained to suppliers, some brands might walk away, too.
We can also expect to see an increase in profitable own-brand activity, analogous to the now-entrenched trend in supermarkets and other Fast Moving Consumer Goods (FMCG) sectors. Wiggle’s DHB (an acronym for Dall, Harvey, Bolwell) apparel brand alone netted the company £10 million (AU$20 million) in annual revenue last year.
In a 2014 interview with RetailWeek, Barden conceded Wiggle “overstretched” its reach into international markets. The company changed its website footer from “we ship to over 90 countries” to “we ship to over 70 countries” in October that year. The byproduct of that is a renewed focus on existing markets.
Australia and Japan will remain central to the merged company’s international growth, though the US market may be tougher going; particularly as more bike brands move to ‘click and pay’ direct sales and others, like Shimano, slash prices. Based on the number of comments US-based articles about the merger attracted, it also appears US consumers are relatively indifferent to the news.
It seems unlikely that Wiggle Australia (Pty) Ltd — whose principal activity according to MAPIL Bidco’s FY2014 annual accounts is “distributor of Garmin products within Australia” — will be impacted in any material way, though CyclingTips has sought comment from Wiggle Australia general manager Adam Johnson.
By any measure, the people most materially and philosophically affected will be the Watsons. Chain Reaction Cycles is still fully owned by the family, with Chris Watson holding 50% of the issued share capital, his parents a combined 20% and the remainder split across siblings Lola Watson, Sabrina Denver and Georgina Warwick. They are set to join a highly-leveraged entity whose ultimate parent has €12.3 billion (AU$25 billion) funds under management. If existing commercial conventions follow, Chris Watson will become a stakeholder in MAPIL and likely land a seat on the board.
Also worth noting are the two companies – Ascef and Premium Cycle Brands – that Watson set up in December 2014. These are listed with the UK Registrar of Companies (England and Wales) under the category of ‘Retail sale of sports goods, fishing gear, camping goods, boats and bicycles.’ Whether a retirement plan or something else, the story is likely to unfold in ways that are hard to predict now.
Cam Whiting is the founder and publisher of Cycling iQ, a website focused on Asia’s role in the globalisation of road cycling. Whether it’s a new UCI race in Indonesia, chatting with a pro cyclist from Japan, a visit to the Chinese factory that makes frames used in the WorldTour or uncovering data on road bike sales in India – if it’s related to road cycling in Asia, it will be at Cycling iQ.