Seeking Alpha
Recommended for you:
Profile| Send Message|
( followers)  

Fossil (FOSL) has just completed its proposed acquisition of Skagen Designs for $231.7 million. This will reduce Fossils cash position from $ 287.498 million to around $ 55.798 million. Also in the deal there is a possibility of another 100,000 shares of Fossil stock being sold if Skagen-based product sales reach certain thresholds.

The addition of Skagen affects Fossil in three ways:

A) Increased Brand Exposure in Europe and Emerging Markets - The Skagen brand is extremely popular in Europe and is gaining ground in East Asia. Skagen has regional offices in Germany, the U.K., Denmark, and Hong Kong. Further, Skagen has recently opened new stores in Asia Pacific, Eastern Europe and the Middle East.

B) Increase in Fossil and Skagen profit margins - By combining Fossil's production resources with Skagen's established supply chain Fossil hopes to achieve increased European, Middle Eastern, and East Asian sales. Fossil might be able to simultaneously decrease operating margins by integrating Skagen's products into their larger production capacity, increasing Skagen's economy of scale.

C) Cross Selling - Fossil can now turn right around and use its resources to promote the Skagen brand in the US. Fossil will use its established supply chain to get Skagen into American stores, and to American buyers. The popularity of Skagen in Europe will likely be a major marketing sales point for Skagen in the U.S.

Mike Kovar stated that Fossil will help build up Skagen's wholesale and retail distribution, while Skagen will help Fossil break into the European markets.

Since their last purchase of Tempus International Corp. on April 12, 2004, Fossil's stock has risen 446.23%. From its prices of $24.38 on April 12th, 2004 to the current price of $133.17.


(Click to enlarge)

Trade:

Short-Term:

  • Buy the APR 12 Bull Call Spread @ 130 / 135
  • Total Risk: $310
  • Max Return: $190
  • Risk-for-Return: 61.29%

Near-Term:

  • Do not invest. Look for a downward market correction. With the VIX reaching a 54-month high and the T2108 at 62%, there is a strong indicator of a market which as become to complacent. Usually a complacent market means a coming shift in market value.

Long-Term:

  • Long FOSL stock. Buy Fossil during the market dips and profit from the general fear in the market. My previous Fossil articles here and here on the Alpha, give a more detailed analysis of why Fossil is going to continue being a market outperformer.
Source: Fossil's Big Acquisition Changes The Game