By Charlie Lunan
Compass Diversified Holdings Inc. (Nasdaq:CODI) executives said 5.11 Tactical’s legacy business selling gear to law enforcement agencies globally generates enough cash to both raise CODI’s dividend and continue investing in 5.11’s rapidly emerging consumer business.
5.11 began selling its apparel and gear to consumers a few years ago via hook-and-bullet retailers, but has been focusing more recently on growing its direct-to-consumer business. In addition to selling online, the company operates 10 brick-and-mortar locations, including five in California, one each in Nevada and Florida, two in Texas and one in Australia.
“What really attracted us to the 5.11 business is the strength of this brand,” said Elias Sabo, a founding partner of Compass Diversified. “But the awareness levels really are more within that protector community. And one of the things that we’ve been able to do with other businesses at this stage is to really help drive greater awareness in using digital marketing techniques or other kind of marketing opportunities to expand awareness. And we think that opportunity exists here to help to grow the consumer side at a pretty rapid pace.”
Though Compass Diversified’s stock is traded publicly, the company acquires, builds and sells companies much as a private-equity firm does. It currently owns controlling stakes in nine companies across multiple industries, including Ergobaby and Liberty Safe and a minority stake in Fox Factory Holding Corp. (Nasdaq:FOXF), which it spun off through an initial public offering in three years ago this week. A year ago, CODI sold CamelBak Products Inc. to Vista Outdoor Inc. (NYSE:VSTO).
Compass Diversified expects to close on its proposed $400 million acquisition of 5.11 by the end of September. For the year ended April 30, 5.11 generated net revenue of approximately $293 million. EBITDA was approximately $38 million, or 13 percent of net sales.
While Compass Diversified has agreed to pay approximately 10.5-times 5.11’s trailing 12-month EBITDA, Sabo noted that the multiple drops to about 9.5 times after accounting for tax assets owned by 5.11.
Regardless, 5.11 is generating enough cash flow to raiseCompass Diversified’s dividend and continue investing in 5.11’s direct-to-consumer expansion.
“It’s a growing and stable part of the business,” Sabo said. “And we view that as something that we can count on quarter in and quarter out. Whether it be police or fire or CIA or FBI or military special forces, those markets are just growing end markets. ”
Formed in 2003, 5.11 maintains a leadership position in the public safety market, including the FBI, which adopted its tactical pant in 1992. The company’s sales have been growing at a high-single-digit to low-double-digit percentage rate for the past four years, enabling it to generate low-double-digit annual growth in EBITDA.
Lead photo courtesy 5.11 Tactical
