Ashworths acquisition of Gekko Brands, LLC has the golf apparel maker looking for new opportunities to expand its distribution channels for both its Ashworth and Callaway brand apparel lines and increase its collegiate licensed apparel business. Gekko markets headwear and a limited amount of apparel under the Kudzu and The Game brands.
The deal, valued at $24 million, is structured as $23 million in cash at the time of closing plus a $1 million promissory note. The remaining partners of the acquired business may earn up to $6.5 million more if “specific EBIT and other operating targets” are met over through fiscal 2008. Ashworth sees all the synergy in this deal coming from expanded distribution and sales with little upside on the operational side.
Although the company said they expect to see opportunities for the Gekko brands to expand their business into the channels that Ashworth currently services, it is clear that Ashworth is adding a new unit that brings some current volume and two key elements to increase the Ashworth business — distribution and headwear expertise. They also pointed to headwear as a “more predictable” and “more stable” business than apparel.
Gekko had sales of $32 million in its fiscal year ended December 31, 2003. Sales in 2003 grew 14%, but the company expects to see a 16% increase in 2004. Operating margins at Gekko were said to run about 200 basis points higher than at Ashworth. Ashworth expects the deal to be slightly accretive for fiscal 2004.
In a conference call with analysts last week, Ashworth management said that “headwear is a piece of equipment in golf, not just an accessory”, as rationale why it makes sense for the Gekko team to add their expertise to the development and sourcing of the Ashworth and Callaway headwear product lines.
Management said that Ashworth headwear sales are only running at about a half million dollars per year now after producing about $5 million in revenue at its peak.
The first Gekko-designed Ashworth and Callaway product is expected to debut at Holiday in a limited way, with a full launch for Spring 2005. Gekko production is primarily China-based, but does have domestic embroidery operations as well.
Gekko currently does about 40% of its business in collegiate licensed product, bookstores and team dealers and 25% of its business in NASCAR. The Corporate business makes up about 18% of sales, while Outdoor is about 10% and Golf contributes less than 8% of sales. Gekkos bigger channels are really what seems to be the plum for Ashworth. The company already has the blessing from Callaway to expand the distribution and add collegiate licensed apparel and has already received the thumbs up for Gekkos current 1,000 collegiate licenses as well as NASCAR.
Ashworth is looking to Gekkos 45 sales reps to sell authentic and basis product into the bookstore and team dealer channels. Management noted that Cutter & Buck was doing a good business in the bookstore market and they want a piece of it as well.
The company also said they will help Gekko improve margins in The Game apparel and will help place The Game and Kudzu licensed headwear product, especially NASCAR, into department stores and golf specialty.
Ashworth will finance the deal through a new five-year bank facility comprised of a $20 million term loan and a $35 million line of credit, which replaces their prior $55 million bank facility. Total liabilities are expected to be around 51% to equity, with about $11.6 million coming from real estate, $20 million from this deal, and another $2.0 million in the line of credit.
In other news at Ashworth, the company has reached a tentative settlement in the class action lawsuit brought by shareholders in 1999. The company said that, under the settlement, all claims will be dismissed and the litigation will be terminated in exchange for a payment of $15.25 million, approximately 82% of which will be paid by Ashworth's insurance carriers.
Ashworth expects to record a $3 million pre-tax charge in its fiscal Q3 related to the settlement. The company has also agreed to adopt modifications to certain corporate governance policies.
The terms of the agreement, which are subject to final court approval and notice to class members, includes no admission of liability or wrongdoing by Ashworth or other defendants. The company said they just wanted to put the suit behind them and “focus on running and growing the business”.
