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A Whiff Of Crayfish

- A foreseeable bit of bike industry M&A went down last week. Wiggle has been quite publicly shopping itself around for the last year. Given that its campaign made noise for so long without results, it was easy to conclude that no one else shared Wiggle's view of its self-worth. But last week's selling price of $281 million proved that nothing could've been further from the truth.

Students of finance will appreciate that this sum represents a 16 times multiple of LTM EBITDA, and a 12 times forward-looking EBITDA. In the post-2008 recession era, this is 18 times as freaky as when I took mushrooms in college with that gorgeous blonde with armpit hair and a most interesting Zippo lighter a groundbreaking multiple. It's far beyond the typical retail EBITDA multiple, and, except for the hottest Silicon Valley startups, it's even lofty from a dot com viewpoint.

Purportedly 53 percent of Wiggle's revenue in the previous 12 months came from international sales. Compare this to 2008 when only 2.5 percent of its total revenue came from international sales. Perhaps this was the magical datapoint which convinced its new owner, Bridgepoint, to pay such a premium. However, as I've previously documented, Wiggle wins its American business thanks to its practice of subverting "Minimum Advertised Pricing," or MAP.

MAP policies are regulations created by US wholesale distributors and directed at their "authorized" retailers. To become "authorized" retailers must agree to follow a brand's MAP policy. Simply put, if an American retailer advertises any given product for less than MAP, then it risks having its supply cut off by that manufacturer. There's a fine line here: According to the courts, it's price-fixing if a manufacturer tells a retailer the minimum selling price. However, it's not price-fixing if a manufacturer tells a retailer the minimum advertised price.

American retailers -- both your local bike shop as well as Competitive Cyclist -- have no choice except to follow these rules. To be clear, retailers neither formulate nor discuss MAP with manufacturers. Here is an example of the sort language manufacturers use with retailers regarding pricing:

"Our MAP is set unilaterally and cannot be the subject of negotiation or discussion with any dealer. It is our obligation to enforce this policy uniformly and fairly, and we must do so on our own. We cannot and will not accept any information from any dealer about prices being charged by another dealer or about possible violations of our policies by another dealer. Please do not call us or send us email about prices being charged by another dealer."

And what happens if an American retailer violates MAP?

"Manufacturer has the legal right to unilaterally cease sales of products to dealer at any time and for any reason without prior notice to the dealer. Manufacturer has unilaterally determined that it will cease to sell products to dealers who choose to advertise these products at below MAP, or in violation of our other policies."

Wiggle is keenly disliked within the US bike industry because it sources its inventory outside of the structure of the US bike industry. Freed from the rules set by American distributors, it can freely disregard MAP with no fear of being cut off.

Based on the handsome multiple it paid, Bridgepoint apparently isn't too concerned about the fact that Wiggle doesn't conform to pricing rules in a market which is crucial to its current and future financial performance. I'd suggest that it should be, as it seems inevitable that global manufacturers will shut down the UK-USA sales channel. Wiggle's end run is too much of a threat to US wholesale and retail and the American market is simply too important for these manufacturers to ignore the loophole. How important? The National Bicycle Dealer Association's authoritative "US Bicycle Market 2010" report ranks the United States first in "Estimated Market Consumption of Bicycles", with a 37.4 percent of global share. By comparison, Japan comes in second at 17.4 percent.

Interestingly, this isn't Bridgepoint's first investment in a UK company saddled with a dubious gameplan for entry into the US. New Yorkers will be plenty familiar with Pret A Manger -- the pretentiously-named British fast food restaurant that first gave a go in the US back in 2002. A fabulous article in The New Yorker outlined the challenge of attuning American palates to crayfish accompanied by shovel-loads of mayonnaise. Analogies to Wiggle abound.

Bridgeport acquired Pret A Manger in 2008. Judging by the chain's limited American expansion beyond Manhattan since 2002 it's unknown whether its transatlantic excurision was worth the bother. Although its 30+ American locations have experienced the same growth rate as its non-US stores, it's not clear whether the US operation is large enough or profitable enough to be consequential. While profits have increased company-wide in recent years, specifics about US profitability aren't easily unearthed. And Pret A Manger's future growth? One word: porridge.

Wiggle has been a formidable competitor over the years. Now, with the whiff of fried crayfish in the air, I'll admit I'm a little less worried about a future Wiggle blitzkrieg on American shores.

- Time to switch gears. I didn't get into this business in the first place because of business. It was because of racing. Time to re-connect. Some PROness for your pleasure: