Dolphin Limited Partnership I, L.P. and an affiliate sent out a release Thursday that they are prepared to offer Johnson Outdoors a transaction that they believe is “superior to the unsuccessful going private transaction.” Dolphin, which together with an affiliate hold approximately 290,000 shares of Johnson Outdoors Inc. Class A common stock, is proposing to make a “sizeable non-control investment” in JOUT by acquiring approximately 1.5 million newly issued treasury Class B common shares at a per share price of $21.10. Dolphin proposes that each Class B common shares would have 10 votes per share and convertible at any time into Class A common shares.
The investment firm did say that if diligence should confirm greater value, they would be prepared to amend the proposed transaction terms accordingly.
Dolphin, in a letter to the members of the Special Committee of Johnson Outdoors that was set up by the company to negotiate the terms of the now-failed attempt by the Johnson family to take it private, arguses that their proposal provides JOUT added liquidity to “take out those shareholders who supported the $20.10 transaction and holds out the prospect for greatly enhanced returns for shareholders” who believe that the company is substantially more valuable than was recognized by the unsuccessful going private transaction.
The full text of the letter to the Committee:
March 31, 2005
Via Facsimile and Federal Express
Members of the Special Committee
Johnson Outdoors Inc.
c/o Susan S. Hassan, Esq.
Skadden, Arps, Slate, Meagher & Flom, L.L.P.
333 West Wacker Drive
Chicago, Illinois 60606-1285
Gentlemen:
Dolphin Limited Partnership I, L.P. and an affiliate (“Dolphin”) hold
approximately 290,000 shares of Johnson Outdoors Inc. Class A common stock.
We were not surprised that on March 22, 2005, the Company's shareholders
failed to approve the proposed going private transaction. Unfortunately, the
Company has not chosen to presently disclose the voting results, but we sense
that the required vote fell substantially short.
The Company blamed the inability to obtain the necessary vote on
institutions who recently acquired shares; however, we believe that it was the
longtime minority holders who stood to lose most by the transaction. The
Company executed its initial public offering in 1987 at a price of $15.50 per
share and, in 1988, a secondary offering at $19.50/share. To our knowledge,
the Company has not paid a cash or stock dividend or split its shares. On
these numbers, the $20.10 unsuccessful going private transaction represented a
1.5% IRR for the IPO shares and a 0.2% IRR for the secondary shares. For the
same periods, the S&P 500 Index (with dividends reinvested) generated IRR's of
approximately 12.0% and 12.2%, respectively. We also note that since the
secondary offering 17 years ago, the Company has only added 40 full-time
employees!
The unsuccessful going private transaction took two years to negotiate,
and we believe, likely cost the Company and all shareholders between $3
million and $5 million (as set forth on page 53 of the proxy materials) and
never offered minority shareholders fair value for their interests. Clearly
JOUT's shareholders and constituents can do better!
If the Special Committee of “independent” directors is committed to
obtaining fair value for the minority shareholders of the Company, now is the
time to make a clean break with the past and, without predisposition, pursue
all methods to maximize value for all shareholders.
Accordingly, Dolphin is prepared to offer the Company a transaction that
we believe is superior to the unsuccessful going private transaction, provides
the Company added liquidity to take out those shareholders who supported the
$20.10 transaction and holds out the prospect for greatly enhanced returns for
shareholders who, like ourselves, believe that the Company is substantially
more valuable than was recognized by the unsuccessful going private
transaction.
Under our proposal, Dolphin would make a sizeable non-control investment
in JOUT by acquiring approximately 1.5 million newly issued treasury Class B
common shares (each with 10 votes per share and convertible at any time into
Class A common shares) at a per share price of $21.10 – the details of this
proposal are set forth below. If our diligence should confirm greater value,
we would be prepared to amend our proposed transaction terms accordingly.
The Unsuccessful Going Private Transaction Never Held Out the Prospect of
Maximizing Shareholder Value
Neither the Special Committee nor the Company made any pretense that in
the two years it took to negotiate the going private transaction, the Special
Committee was charged with examining superior alternatives to this
transaction. As its financial advisor, the Special Committee retained William
Blair who was also an underwriter for the Company's IPO in 1987 and follow-on
offering in 1988. As noted, at the $20.10 proposed transaction price,
investors in these offerings have not received results. Moreover, the
Company's February 15, 2005 going private proxy statement (page 39) states:
"William Blair was not requested to, and did not, participate in the
negotiation or structuring of the merger nor was it asked to consider,
and its opinion does not address, the relative merits of the merger as
compared to any alternative business strategies that might exist for
Johnson Outdoors or the effect of any other transaction in which Johnson
might engage. In connection with its engagement, William Blair was not
requested to approach, nor did it hold any discussions with, third
parties to solicit indications of interest in a possible acquisition of
Johnson Outdoors."
In the Company's press release of March 16.issued in response to Dolphin's
highly detailed and factual release several days earlier.the Special Committee
stated:
"The terms of the merger agreement with JO Acquisition Corp. permit
Johnson Outdoors and the Special Committee to explore, under specified
circumstances, an alternative transaction that we deem to be superior in
value. No third party has come forward with an alternative transaction
proposal."
However, the Company's release did not acknowledge that the Company, on
page 29 of its proxy materials, made it clear that negotiations with any third
party would be futile because the Johnson family, with its supermajority vote,
stated that it would not support any such alternative transaction.
We think the Special Committee should now change course, engage a new
banker with less history with the Company and seek out and explore
transactions on a level playing field rather than have the buyout group
prevent minority shareholders from obtaining maximum value for their
investment.
Dolphin believes that its proposal provides the Special Committee and the
Company with a pathway towards a transaction that will afford superior value
to shareholders whose interests the Special Committee is charged with
protecting.
There Exists Greater Value in JOUT Than Was Recognized
in the Unsuccessful Going Private Transaction
We believe that industry participants would find JOUT to be an excellent
strategic and financial fit, at a higher value for all shareholders, while
adding growth prospects to JOUT's core businesses benefiting its employees and
the communities it serves. The Company has three strong, highly profitable
businesses – Marine Electronics, Outdoor Equipment and Diving. The Company's
fourth business, Watercraft, has been struggling; however, by the Company's
own account, it has undertaken the necessary restructuring action to enhance
prospects for this business. The Company stated in its 2004 Form 10-K
(page 8):
"This effort will make Watercraft leaner, yet more flexible, more
focused, and more competitive going forward. It should make the
Watercraft business better prepared to deliver financial performance
equal to the strength of the Company's winning brands. The plan is on
track and is expected to be completed as expected in the first quarter
of fiscal 2005."
We also believe that there are substantial selling and cost synergies that
would be generated in a strategic transaction, further enhancing the
attractiveness of the Company to an industry player, and that the Company will
soon likely have no net debt.
Based on the Company's public disclosures, we note the following facts
that we believe support our assessment of value in excess of the $20.10
offered in the unsuccessful going private transaction. Of course, if any of
our facts are materially incorrect, please specifically advise us.
Performance
(i) The Company's three profitable businesses in fiscal 2004 produced
combined sales and EBITDA* of $279.5 million and $48.4 million up
from $236 million and $32.7 million in fiscal 2003, respectively.
(ii) For the five months of fiscal 2004, the Marine Electronics segment
included sales of $13.6 million and an operating loss of ($.4)
million from the May acquisition of Techsonic, Inc. for $28.2
million. Fiscal 2004 results included ($4.2) million of
unspecified "costs" from this acquisition which was partially
offset by a $2.0 million legal settlement.
(iii) The struggling Watercraft business in fiscal 2004 produced sales
of $75.2 million and an EBITDA* loss of ($6.9) million,
respectively vs. sales and an EBITDA* loss of $80 million and
($5.8) million, respectively in fiscal 2003. Included in the 2004
loss was $2.5 million (out of an expected total of $3.1 million
through the first fiscal quarter of 2005) of restructuring
charges.
(iv) The expected "40%-50%" drop in fiscal 2004's estimated $56 million
of military tent sales (all outlined in the Company's fiscal 2004
10-K) should be offset by a fiscal 2005 positive swing from the
Techsonic, Inc. acquisition and the "expected" improvement in the
Watercraft business.
Charges, Costs and Expenses
(v) In fiscal 2004, the Company incurred an EBITDA charge from central
overhead ("other") of ($14.1) million as compared to ($11.3)
million for fiscal 2003. The going private proxy statement
indicated that $0 .7 million would be saved by being a private
company.
(vi) In fiscal 2004 the Company incurred $1.6 million of charges from
related party transactions for "consulting services, aviation
services, office rental, royalties and certain administrative
services" and the Chairwoman received approximately $1.2 million
of salary and bonus.
(vii) In fiscal 2004, the Company incurred $9.0 million in R&D expense
and $16.6 million in advertising expenses. For Fiscal 2003 these
figures were $6.7 million and $14.9 million, respectively.
(viii) Although we don't know its location in the income statement,
fiscal 2004 results included a loss of $1.2 million on the
disposal of PP&E.
(ix) The Company, at the 2004 fiscal year-end had $103 million of gross
PP&E of which $24 million was property, buildings and
improvements.
Other Considerations
(x) As of the 2004 fiscal year-end, the Company had available a U.S.
Federal NOL of $28 million and a $2.8 million foreign NOL. The
Company posted a net, deferred tax asset of $26.0 million which,
at a 35% tax rate, is worth about $1/share.
(xi) The Company is moving into its two strongest fiscal quarters
which, for fiscal 2004, generated 61% of sales and 117% of
operating profit. Accordingly, at the end of the 2005 third
fiscal quarter (June 1), it is likely that the Company's
approximately $18 million of net debt at December 1, 2004 will be
eliminated.
In short, we believe that the Company has a portfolio of attractive
businesses that could fetch top dollar in an open and level sale process or
other financial transaction. The Dolphin proposal seeks to unlock value that
would benefit all shareholders.
The Dolphin Proposal Is Superior to the Unsuccessful Going Private
Transaction, and It Is Incumbent on the Special Committee to Undertake a
Serious Evaluation of the Proposal
Dolphin's Objectives
Dolphin is making its proposal with the following objectives:
-- to acquire a non-controlling equity stake in the Company at a price in
excess of the $20.10 offered to minority shareholders in the going
private transaction;
-- to provide the Company with additional funds to take-out at a premium
those shareholders who voted in favor of the $20.10 going private
transaction;
-- in addition or in the alternative, to provide the Company with funds
to pursue accretive, value enhancing acquisitions;
-- to level the corporate playing field, so that no shareholder on its
own can effectively dictate the transactions that the Company, the
Board, the Special Committee and the minority shareholders may
consider;
-- to add for minority shareholders independent board representation
committed to seeking out potential acquirers and exploring all methods
to maximize value, including continuing to run the business as an
independent company and pursuing analyst coverage, among other
strategies.
Elements of Dolphin's Proposal
Dolphin is proposing:
(i) that it make a sizeable non-control investment in JOUT by acquiring
approximately 1.5 million newly issued treasury Class B common
shares (each with 10 votes per share and convertible at any time
into Class A common shares) at a per share price of $21.10. There
are currently 3.0 million Class B shares authorized of which
approximately 1.2 million are currently outstanding, so that after
the issuance of the new Class B shares, Dolphin (together with any
other participating minority shareholders) and the controlling
family would have a similar percentage of the combined vote;
(ii) that the proceeds of its investment be used for making open market
purchases of Class A common stock or a pro rata tender offer for
minority shares at an attractive premium to market, and/or making
accretive acquisitions;
(iii) that, in connection with this proposal, Dolphin receive an
appropriate number of board seats. As independent shareholder
representatives, Dolphin's designees would seek to maximize value
for all shareholders by pursuing, among other things, meaningful
analyst coverage for so long as the Company remains public, and
fully exploring a range of value enhancing transactions, including
an appropriate recapitalization or a sale to a financial or
strategic buyer at a fair price for all shareholders;
(iv) that Dolphin would receive customary dilution protection;
(v) that Dolphin's investment commitment is only subject to the
satisfactory completion of reasonable and customary diligence,
appropriate documentation and registration rights. If our
diligence should confirm greater value, we would be prepared to
amend our proposed terms accordingly;
(vi) that during the pendency of diligence and negotiation concerning
Dolphin's proposal, JOUT would not pursue another transactions;
and
(vii) that, although we have not as yet discussed this proposal with any
other shareholder, any financially qualified minority shareholder
that wishes to participate pro rata with Dolphin may do so.
We do not believe that our proposal requires shareholder approval under
the NASD Marketplace Rules or otherwise.
Duties of the Special Committee
We need not remind you of the fiduciary duties of the Board and the
Special Committee under Wisconsin law and the Company's Articles to act in the
best interests of all shareholders. After the “independent” members of the
Special Committee and its advisors have had an opportunity to review Dolphin's
proposal, we believe the Special Committee should conclude that it is a
superior financial proposal as compared to the unsuccessful $20.10 going
private transaction, while in no way detracting from the legitimate financial
interests of the Johnson family. Therefore, we believe that the “independent”
members of the Special Committee are obligated to give our proposal serious
and disinterested consideration.
Although we do not have investments in companies that compete with JOUT,
we are prepared to execute an appropriate confidentiality agreement that does
not constrain the diligence process or restrict our ability to communicate
with the Board or, in respect of publicly available information, the Company's
shareholders. As a long time interest in a sizeable Wisconsin company takes
me there periodically, we and our advisors are prepared to commence promptly
and conclude our work expeditiously.
This proposal remains available until the close of business on April 15,
2005. As we believe that it is appropriate for all shareholders to be equally
informed, we are publicly releasing this letter. We suspect all shareholders
will look forward to the Special Committee's analysis and reply regarding this
value creating proposal.
Very truly yours,
Donald T. Netter
Senior Managing Director
cc: Ezra G. Levin, Esq.
Abbe L. Dienstag, Esq.
* Before an allocation for corporate overhead ("other")
