KMD Brands (ASX:KMD, NZE:KMD) rejected a proposal from Stokehouse to demerge Rip Curl into a separately listed company on New Zealand's Exchange and Australian Securities Exchange, followed by a merger with Stokehouse, according to a Tuesday Australian and New Zealand bourse filing.

Stokehouse proposed that, following the demerger of Rip Curl from the company and the subsequent merger, its shareholders would own 22% of the combined entity, per the filing.

The board determined that the deal undervalued Rip Curl, would dilute shareholder value, and introduced significant risks, including Stokehouse's weak profitability, high debt, unclear funding sources, and the costly operational disruptions associated with the separation, the filing said.

The company concluded that the proposal lacked a clear path to enhancing shareholder value and decided to continue with its existing transformation strategy, the filing added.

The company's Kiwi shares rose around 3% in recent Tuesday trade.