Descente Ltd (8114)
Following Itochu's buyout trail
UPDATE (August 5, 2024): Itochu announced it plans to take Descente private. Offer price is 4350 yen per share, or 35% premium over the share price when this report was written
In a previous post, I explored the dynamics of Japan’s parent-child listings and highlighted the opportunities they offer. If you haven’t already, I recommend reading that post first for an introduction (you can find it here).
In this and the following post, I will present two actionable ideas aligned with the parent-child theme. Specifically, I will focus on high-quality businesses that are likely to become take-private candidates.
Established in 1957, Descente is a Japanese sportswear brand with a rich history. It ranks among the top three Japanese sportswear brands, alongside Mizuno and Asics.
The name "Descente" (derived from the French word for "descent") is aptly represented by its logo featuring three downward arrows (see below). As you might guess, the brand is most famous for skiwear and winter apparel.
Descente is highly regarded for its sleek, functional designs and premium quality. Aside from winter sports, the brand also serves a diverse range of niche sports and activities including training, endurance sports, golf, and cycling.
Although highly regarded, Descente remains lesser-known on the global stage, primarily because the company is operationally focused on just the East Asian countries - Japan, Greater China, and South Korea.
The company is interesting for several reasons today:
Turnaround: Under the leadership of a new CEO from parent company Itochu, Descente has been executing a turnaround plan aimed at boosting profitability in Japan and South Korea.
Descente China: Operated in partnership with Chinese sportswear giant Anta, Descente China has emerged as the key growth engine.
Take-private candidate: In recent years, Itochu has been on a “buying spree” of its child companies including Family Mart, Itochu-Techno Solutions, and Daiken Kogyo. I believe Descente could be next. Itochu has already raised its stake in Descente from 30% to 40% in 2019, signaling a desire for greater control.
The company markets nine brands under its umbrella:
In-house brands: Descente and Movesport
Regional trademarks in East Asia: Le coq sportif, Munsingwear, Arena, Umbro, and INOV
Licensed brands: Srixon and Lanvin Sport
Revenue breakdown by brands is shown below.
It should be noted that the pie chart above doesn’t fully reflect the contributions of the Descente brand. This is because it doesn’t include Descente China, which is an equity method affiliate and does not have its revenue consolidated.
The following entities are not fully owned:
Descente China: 40% ownership (equity method)
Arena Korea: 35% ownership (equity method)
Le Coq Sportif China: 75% ownership (consolidated)
Relationship with Itochu
In 2019, Itochu initiated a tender offer to increase its stake in Descente from 30% to 40%. The goal was to gain enough board control to overhaul Descente's management (a move that ultimately proved successful). But what led to this action?
The two companies go way back. Itochu, one of Japan's largest trading companies with deep roots in the textile industry, has been a key supplier to Descente since the brand's inception (I have previously written on the Japanese trading companies, including Itochu, here).
Itochu first invested in Descente in 1971, and subsequently made additional equity investments on two occasions when Descente found itself in financial trouble. The first was in 1984, triggered by an inventory issue with the golfwear brand Munsingwear. The second occurred in 1998, after Descente lost its Adidas licensing in Japan (which constituted 40% of its revenue at the time) following Adidas’ decision to establish its own subsidiary in Japan.
These interventions ultimately led Itochu to acquire 30% equity stake in Descente, thereby gaining considerable influence over the company. Between 1994 and 2013, Itochu appointed three successive generations of CEOs at Descente.
Despite this deep involvement, the relationship between the two companies was complicated. This is because Descente’s founding family, the Ishimotos, had a strong desire to retain their independence. In 2013, a dramatic boardroom coup saw the replacement of the Itochu-appointed CEO with a scion from the founding family, straining the relationship between the two companies.
There were also disagreements between the two sides on strategy. Itochu advocated for more aggressive strategies to boost shareholder value, including allocating more management resources to Descente China and taking further steps to restructure and enhance profitability in the Japanese business. In contrast, the founding family preferred to maintain the status quo, showing little enthusiasm for change.