Crocs Inc. tumbled the most in more than a year after agreeing to buy casual-shoe brand Heydude for US$2.5 billion in an effort to bolster its fast-growing business of offbeat footwear.

The purchase will be funded by US$2.05 billion in cash and US$450 million in Crocs shares issued to Heydude founder Alessandro Rosano, according to a statement Thursday. Crocs said it expects the deal to immediately add to its sales growth and earnings, while the combined operations will generate “significant” free cash flow.

The agreement underscores the rapid expansion of Crocs’ business as its once-derided foam clogs catch on with a hip Gen Z crowd. Crocs has said it expects revenue growth of as much as 65 per cent this year. 

Heydude, which will operate as a stand-alone division, makes lightweight, casual shoes and sandals for men, women and children. Most of its products are priced at less than US$80.

Crocs shares dropped 12 per cent to US$122.31 at 12:11 p.m. in New York after sliding as much as 17 per cent, the most intraday since April 2020. The stock had more than doubled this year through Wednesday’s close.

“We think shares are mispriced this morning,” Erinn Murphy, an analyst at Piper Sandler, said in a note to investors. Investors may not be familiar with the Heydude brand and were concerned that Crocs didn’t reiterate its outlook, the analyst said, though Piper expects that fourth-quarter results will top Wall Street expectations. 

“Heydude was the No. 8 preferred footwear brand for teens this fall -- up from No. 54 two years ago” in Piper’s “Taking Stock With Teens” survey, Murphy wrote.
 

TERM LOAN

The deal for closely held Heydude is expected to close in the first quarter. Crocs expects to fund the cash component with a US$2 billion term loan and borrow US$50 million under an existing revolving credit facility.

Standard & Poor’s placed Crocs, which has a BB- rating, on credit watch with negative implications.

Citi is financial adviser to Crocs, while Perkins Coie LLP and Bird & Bird provide legal counsel. LVC Asia Pacific Ltd. is Heydude’s financial adviser, with Chiomenti, Deacons, Cozen O’Connor, Sullivan & Cromwell and Croon Law Group LLC serving as legal counsel.