A market report from Capstone Partners found that M&A activity has slowed in 2023 as sellers and buyers have approached transactions with increased caution amid economic headwinds. However, the company found that price multiples remained robust for making deals as the industry continues to benefit from elevated spending and participation rates since the pandemic.

Key takeaways from Capstone’s Outdoor Recreation & Enthusiasts Market Update report, co-authored by Kenneth Wasik, managing director and head of consumer investment banking and Peter Bailey, director at Capstone Partners include:

  1. Consumer spending in the outdoor recreation segment remains robust despite stubborn levels of inflation and persistent recessionary headwinds;
  2. Outdoor participation rates remained healthy, with the number of participants growing to a record number in 2022;
  3. Effective inventory management has been a key focus for sector participants as supply chain normalization provided more visibility into ordering forecasts;
  4. Mergers and Acquisitions (M&A) activity slowed in the sector through year-to-date (YTD) 2023, a trend also found across the broader middle market;
  5. Strategic buyers accounted for over 85 percent of acquisitions in the sector in YTD 2023, while private equity groups showed more caution and were not as active;
  6. The Sporting Goods segment recorded the highest YTD 2023 M&A deal volume as consumers continued to spend on fitness, wellness and leisure; and
  7. Privately-owned brands increasingly eyed acquisition opportunities to complement product offerings and expand operations in advance of a potential exit in the future.

“This is a very interesting time in the Outdoor Recreation space,” said Wasik in the report. “Despite skeptics, the consumer continues to participate in outdoor activities at high levels, originally fueled by COVID-19 and changing lifestyles. More recently, inflation has taken a bite, but not enough to change consumer behavior. We believe this reinforces our thesis that Outdoor Recreation is a recession-resistant sector with strong brand loyalty and certain price inelasticity. Declines in M&A volumes are more driven by financial buyers’ reluctance to enter the space during uncertain economic times than any problems with the sector’s fundamentals. The fact that strategic buyers remain active is a good sign of the near future of M&A in the space.”

Deal Pace Slows
The Outdoor Recreation & Enthusiasts report found that 27 deals were completed year-to-date through May 17, down 50 percent from 54 percent at the same time in 2022. In recent years, deals in the outdoor recreation space peaked in 2021, with 159 completed before easing to 120 finalized in 2022. In the first year of the pandemic, activity slowed to 125 percent after reaching 145 percent in 2019, 112 percent in 2018 and 88 percent in 2017.

Capstone said the declines in M&A activity through the first quarter had not been unique to the Outdoor Recreation & Enthusiasts sector as total middle market deals fell 14.3 percent year-over-year. The moderating transaction environment was attributed to elevated interest rates and caution in inorganic growth pursuits.

Capstone wrote in the study, “Eroding consumer purchasing power has negatively impacted transaction volume as many sector players have struggled to maintain similar levels of sales growth experienced during the pandemic. A tightened lending environment, exacerbated by turmoil among regional banks, has also added challenges to the M&A market for privately owned companies. However, high-quality sector participants with a strong gross margin profile, customer loyalty, and recurring revenue have continued to attract healthy buyer appetite.”

Transaction Valuations Remain At Premium Levels
Capstone’s analysis showed that premium multiples continue to be awarded to high-quality, privately-owned sector players. Camping and Hiking targets led M&A pricing, with an average multiple of 12.6x EV/EBITDA from 2017 to the year-to-date 2023. The Sporting Goods segment followed with an average multiple of 10.8x EV/EBITDA, then Tactical & Hunting with 10.2x; Outdoor Power Sports at 8.9x and Boating & Watercraft at 7.2x.

U.S. consumers’ resilience has supported the valuations and has “continued to thwart one of the more anticipated recessions in recent memory.” Capstone said that through April, personal consumption expenditures for sporting equipment, supplies guns & ammunition increased 1.7 percent year-over-year, according to the U.S. Bureau of Economic Analysis. In addition, restricted community-based activities during the pandemic have continued to attract consumer purchases, with expenditures on membership clubs, sports centers, parks, theaters, and museums rising 16.9 percent year-over-year.

Capstone further noted that according to the Outdoor Industry Association, despite inflationary headwinds, outdoor participation increased 2.3 percent year-over-year in 2022 to a record 168 million participants. Among larger activities, participation in camping, skiing and climbing increased 12.0 percent, 8.5 percent and 5.6 percent, respectively.

Capstone also noted that while the industry has been battling margin pressures amid elevated inventories, select players garnered healthy revenues despite inflationary headwinds, citing gains at Topgolf, Malibu Boats and Dick’s Sporting Goods. Capstone wrote in the study, “The sector has yet to experience a widespread trade-down effect as consumers have continued to prioritize spending on outdoor products and equipment.”

Finally, also supporting robust valuations for deals getting done are solid trading multiples for many publicly-traded companies in the sector despite the unsettled broader equity market. The average EBITDA multiple in Capstone’s Camping & Hiking index improved to 12.7x EV/EBITDA from 11.8x EV/EBITDA in the prior year. Capstone wrote, “Healthy trading multiples among public companies often bodes well for valuations among privately-owned businesses pursuing a liquidity event. While M&A activity has remained challenged through YTD 2023, sector players with efficient inventory management, strong gross margins, and revenue visibility have continued to attract buyer and investor appetite.”

Strategic Buyers Dominate M&A Activity
Strategic buyers upheld transaction activity, accounting for 85.2 percent of deals in the YTD period. Capstone said, “Consolidation among sector players has persisted despite recessionary headwinds as buyers have actively sought targets in high-growth segments.”

Notably, the Sporting Goods segment comprised 16 out of the 27 YTD transactions. Within this segment, golf equipment and accessories providers garnered strong buyer interest, evidenced by Creatz’s parent company Uneekor’s acquisition of Evnroll Putters in April. Other high-profile deals this year mentioned in the study include Dick’s acquisition of Moosejaw from Walmart; Edmonton-based KV Capital’s agreement to acquire Mountain Sports Distribution and Compass Diversified-backed Marucci Sports’ acquisition of Baum Bat.

Capstone said that anecdotally, dealmakers have noted that privately-owned companies have been more open to seeking acquisitions to augment organic growth. Capstone wrote in the study, “Sector players are expected to continue to pursue targets that add complementary products — creating valuable opportunities for business owners pursuing a sale.”

Bailey saw the return of private company business owners and strategic acquirers to January’s SHOT Show to drive record attendance as an optimistic sign for M&A activity. He wrote in the study,” After a tactical pause prioritizing internal business operations, both are increasingly targeting M&A as an important part of their corporate strategy and growth plans and expect a tightening spread in the zone between buyer and seller valuation expectations in the sector.”

Financial Buyers Retreat
Meanwhile, financial buyers have become more selective, accounting for just 14.8 percent of total transactions in the YTD period; however, select private equity firms have actively used capital towards middle market sector participants, including KV Capital’s acquisition of Mountain Sports Distribution through its newly formed Fund II. Capstone wrote, “Sponsors are expected to remain cautious in their acquisition pursuits, especially as transaction financing costs remain elevated. Further disinflation and clarity over the Federal Reserve’s terminal interest rate may draw private equity firms back to the market.”

Recent transactions called out in Capstone’s Market Update report include:

  • 04/27/23 – Outdoor Technology acquired by Dialectic
  • 04/17/23 Evnroll Putters acquired by Creatz
  • 04/11/23 Delsyk Design acquired by ROTO Slovenia
  • 04/04/23 Baum acquired by Marucci Sports
  • 03/28/23 Mountain Sports Distribution acquired by KV Capital
  • 03/16/23 TuffStuff Fitness acquired by Brooks Industrial
  • 03/14/23 Pan Pacific RV Centers acquired by Camping World
  • 03/13/23 EastPoint Sports acquired by Buffalo Holding
  • 03/08/23 Dynamic Discs acquired by House of Discs
  • 02/22/23 Moosejaw acquired by Dick’s Sporting Goods
  • 02/16/23 Precision Shooting acquired by Heritage Outdoor
  • 01/19/23 B4 Adventure acquired by True Play
  • 01/11/23 GT Golf acquired by Kinzie Capital Partners
  • 01/01/23 Powerbull Bat acquired by Big Fly Factory
  • 12/08/22 The Putting Arc acquired by Golf Training Aids
  • 11/24/22 Fiocchi Munizioni acquired by CSG
  • 10/21/22 Penalty Box Hockey acquired by Pure Hockey
  • 10/20/22 Bob Ward & Sons acquired by Al’s Sporting Goods
  • 10/17/22 Fins and Feathers acquired by Yellow Dog Flyfishing
  • 10/06/22 Dirty Jigs Tackle acquired by Nichols Lures
  • 10/04/22 Whisker Seeker acquired by PRADCO Outdoor Brands

To access Capstone’s Outdoor Recreation & Enthusiasts Market Update Report, go here.

Photo courtesy Capstone