While Vista Outdoor’s stock has seen an uptick following news of Colt CZ making an unsolicited offer to acquire the company for $30 per share, or for $1.74 billion, analysts believe Vista’s board will reject the offer and follow through on its planned sale of Vista’s ammo business to Czechoslovak Group (CSG).
As reported by SGB Media, Colt CZ’s offer was announced late Wednesday, and shares of Vista rose on Friday to $1.01, or 3.9 percent, to $26.76. On Monday, Vista’s shares rose another $1.41, or 5.3 percent, to $28.17.
Czechoslovakia-based Colt CZ is considered one of the world’s leading manufacturers of firearms, tactical accessories and ammunition.
Under Colt CZ’s proposal, Vista and CZ would merge, with Vista contributing 58 million shares and Colt CZ shareholders contributing 27 million shares. Vista shareholders would own 55 percent of the new company post-transaction.
Colt CZ’s offer involves $900 million in new financing, including $600 million in new equity issued at the transaction price and $300 million in debt. After closing, the new financing would be used to execute a $900 million share buyback.
Colt CZ’s proposal calls for keeping the company together, scrapping plans to separate Vista.
“The market’s view of the Czechoslovak Group transaction was clear in its reaction to the announcement, which resulted in the rapid fall in (Vista’s) share price on October 16, 2023,” said Jan Drahota, Colt CZ’s CEO and chairman, in a letter to Vista’s board published on its website late on Wednesday.
“It is apparent to Colt CZ that, with the separation of the sporting products segment, the remaining outdoor products segment will be subscale as a stand-alone public company with substantial risks,” Drahota noted. Colt CZ added that it already had strong support from its lenders.
In October, Vista and CSG, a defense-oriented firearms company also based in Czechoslovakia, announced an agreement to merge Vista’s Sporting Products (ammo) business with CSG in an all-cash deal valuing it at $1.9 billion on an enterprise value basis, which includes debt. Vista’s ammo business includes CI, Federal, Hevi-Shot, Remington, and Speer.
The deal is expected to close in calendar 2024, pending regulatory approvals. Upon closing, Vista Outdoor would continue to operate the Vista Outdoor business while being renamed Revelyst. The outdoor business includes Foresight Sports, Bushnell Golf, Fox, Bell, Giro, CamelBak, QuietKat, Bushnell, Primos, Simms, Camp Chef, and Stone Glacier.
B. Riley reiterated its “Buy” rating and $38 price target following the news. In a note, B. Riley analyst Eric Wold said he believes the Colt CZ proposal is inferior to the current plan to sell the Sporting Products segment to CSG and keep the Outdoor Products segment as a stand-alone public company. Wold wrote in a note, “In our opinion, the proposed combination not only overlooks the potential for meaningful margin improvement for the Outdoor Products segment next year but neglects to consider both the regulatory risks of the proposed combination and the likelihood that the valuation multiple of the combined company will remain constrained and penalize current VSTO shareholders even further.”
Wold said that while the Outdoor Products segment is guiding EBITDA margins of less than 8 percent for fiscal 2024, B. Riley is projecting “meaningful improvements” as lower-margin inventory is cleared from the marketplace and retailers return to normalized inventory restocking patterns. Wold wrote, “We believe that either this is playing into the inferior valuation offered by Colt CZ Group, or they are cleverly disguising their expectations for improving margins next year.”
Wold further wrote that CSG is assuming regulatory risk related to acquiring Vista’s Sporting Products business. CSG has agreed to pay a $115 million break-up fee if the sale is not approved. Wold further believes Vista’s board received at least three offers for its Sporting Goods business and considered the potential regulatory risk in agreeing to a deal with CSG.
Finally, Wold wrote that combining Vista Outdoor with another firearms business “could keep valuation multiple constrained” since a primary reason for the proposed break-up of the Sporting Products and Outdoor Products businesses was because Vista’s stock was receiving a lower valuation multiple typically assigned to firearms and ammunition companies. “We expected the stand-alone Outdoor Products company to receive a more appropriate multiple in the high-single-digits to low-double-digits range. By keeping VSTO intact and combining with the Colt CZ Group, we would not be surprised if the valuation multiple for the proposed ‘New Vista’ remained constrained—which would likely impair current shareholders.”
Jim Chartier, an analyst at Monness, Crespi, Hardt & Co., reiterated his “Buy” rating on Vista Outdoor at a $30 price target following the news of Colt CZ’s unsolicited offer. Chartier said that while Colt CZ argues that Vista’s stock price decline following news of the sale of the Shooting Products segment shows investors’ disappointment with that transaction, he believes the valuation for the Shooting Products transaction was largely in line with expectations, and the stock price decline reflected the “meaningful reduction” in guidance related to the Outdoor Products’ business.
Chartier added, “And if management can achieve the EBITDA improvement they discussed on the last conference call, we believe Vista shares are worth more than $30.” Chartier also added that while Colt CZ cited significant revenue and cost synergies for the combined businesses, that could be “partially mitigated” by the impact of combining the Outdoor Business segment with a firearms manufacturer. Firearms would account for approximately 16 percent of the new company.
Chartier noted that several outdoor retailers refused to carry Outdoor Products items in the past because Vista had previously owned Savage Firearms.
REI and Canada’s MEC were among stores pausing sales of Vista’s firearms-related products. Savage began producing AR-15-style rifles in 2017. In 2019, Vista sold the Savage Arms and Stevens firearms brands to a financial buyer.
Chartier concluded, “Vista said its Board of Directors would review the proposal. However, we do not expect they will accept it for the following reasons:
- They believe Outdoor Products and Shooting Sports are worth more separate than combined.
- The transaction price is only 16.5 percent above Wednesday’s closing price.
- If Outdoor Products drives the EBITDA improvement discussed on its last conference call, the stock should be worth more than $30.
- The combination with a firearms manufacturer creates potential risks to the Outdoor Products business.”
Roth MTM reiterated its “Neutral” rating at a $26 price target. Analyst Matt Koranda said his team’s initial analysis of the Colt CZ proposal suggests it will be rejected by Vista’s Board and/or shareholders. He wrote, “CZ’s share contribution in the proposed merger seems arbitrary, and the implied valuation that CZ is giving itself credit for does not seem realistic (approximately 7x EV/EBITDA by our estimation). CZ could offer more cash (potentially with additional debt, although this would increase leverage).”
Koranda likewise wrote that any merger with Colt CZ would likely lead to Vista continuing to be valued at a mid-single-digit EBITDA multiple, similar to firearms/ammunition firms such as Smith & Wesson and Sturm, Ruger & Co. He also noted that Colt CZ’s proposal doesn’t address “the fundamental issue that the ammo segment’s earnings power could be reset lower in the coming FY, barring a significant election-year demand surge.”
Photo courtesy Colt CZ
