Investment case

Samsonite looks smart to walk away with Tumi

Bagging Tumi makes sense for Samsonite. The US group is selling out to its larger Hong Kong-listed rival for $1.8 billion. That's a big price tag. But Tumi's upmarket cabin bags will boost Samsonite's appeal to chief executives and other high-rollers. And with the buyer's help the brand could travel a lot further outside the United States.

Strategically, Samsonite's investment case looks solid. The $4.3 billion company has already broadened its product range with a series of smart, small takeovers, like the $35 million purchase of Hartmann, a faded US luxury brand. But Tumi was the only sizeable public target.

This deal gives Samsonite a stronger premium offering to take on competitors like Rimowa, plus a new fanbase in the business class lounge. Black briefcases and other professional products account for 45 per cent of Tumi's sales, while Samsonite caters largely to tourists on lower budgets. That's why Tumi is considerably more profitable: it converts 23 per cent of revenue into Ebitda, 7 percentage points more than its new owner.

That said, the deal's finances look somewhat stretched. Debt-free Samsonite will take on some oversized financial baggage, borrowing up to $1.925 billion of term debt. Leverage will soar to 3.6 times Ebitda. That is a racy multiple for a listed blue-chip and would make life hard if, say, a big downturn in global tourism knocked sales.

The agreed deal values Tumi at nearly 28 this year's forecast earnings and roughly $500 million more than the company's previous standalone value. To justify that premium Samsonite would need to extract nearly $80 million of annual benefits, taxed at 35 per cent and capitalised at 10 times, Breakingviews calculates. That equates to 14 per cent of the US group's last reported sales.

Though Samsonite hasn't publicly set any targets, this may well be possible. As North America now brings in 68 per cent of Tumi's revenue there should be scope to sell more abroad. And, the combined group should enjoy economies of scale in areas like purchasing, research and marketing.

But, it will be a big undertaking. Samsonite will need to bear down on costs with all the force of a traveller trying to cram everything into their single carry-on.