By Eric Smith
COVID-19’s latest victim is an acquisition that was announced just as the pandemic began sweeping across the U.S.
Clarus Corp., in an 8-K filing Friday morning, said it was terminating its planned purchase of protective case manufacturer S.K.B. Corp. (SKB) due to “recent events surrounding the COVID-19 global pandemic, and the economic uncertainties in the United States and globally as a result thereof.”
Salt Lake City, UT-based Clarus had announced its agreement to acquire the Orange, CA-based brand on March 12 for $85 million in cash and 1.15 million shares of Clarus common stock.
According to the 8-K filed May 1, the purchase agreement expired on April 30 and is no longer effective.
Founded in 1977 by Steve Kottman and Dave Sanderson, SKB designs and manufactures molded polymer transport cases engineered for a diverse range of equipment. In 2019, SKB generated $53 million in sales and more than $9.5 million of adjusted EBITDA.
When Clarus announced the agreement to acquire SKB, Clarus President John Walbrecht said the addition would extend the company’s “innovate and accelerate” brand strategy focused on the go-to-market process across a more diversified user portfolio.
“We regularly evaluate potential acquisitions to add to and complement our portfolio, and SKB is a perfect match,” Walbrecht said at the time. “We believe that the acquisition of SKB presents a compelling opportunity to extend our brand formula over a broader base and advance our strategy of growing both organically and through accretive, value-enhancing transactions.”
SGB Executive has reached out to Walbrecht for comment and will update the story when he responds.
Just before announcing the deal, Walbrecht told analysts on Clarus’ fourth-quarter earnings call that a deal was imminent, though he didn’t tip his hand on the brand or category Clarus was pursuing.
“Consistent with our focus on the disciplined pursuit of value-enhancing external growth opportunities, we have identified a target that meets our stringent M&A criteria and expect to have more news to share if this opportunity progresses further,” Walbrecht said on March 9.
He said the addition of SKB would complement Clarus’ “superfan” brand strategy. That’s what the company calls its pursuit of assets that might seem disparate with each other but have the shared quality of being the market share leader for one product in particular and have dominant brand awareness among their respective category’s core consumers.
“With a more than 40-year history of producing some of the best transport cases in the world, SKB is uniquely aligned with our superfan brand strategy,” Walbrecht said. “We believe our financial scale and proven sales and marketing expertise will enable us to accelerate SKB’s growth and reach. Immediately following the closing of the transaction, we intend to expand SKB’s domestic footprint in core markets, as well as internationally, and lean into SKB’s strong network of distributors and dealers. We are excited to welcome the SKB team to the Clarus family of brands.”
Stifel analyst Jim Duffy told investors in a Friday morning note that he wasn’t surprised by the mutual decision by both companies to terminate the acquisition and that it was “prudent” for Clarus to back out amid the “rapid deterioration in market trends from global closures and forward uncertainty.”
“The purchase price (~10.1x trailing EV/EBITDA) would have severely limited CLAR’s financial resources heading into a certain global recession with an uncertain duration,” Duffy wrote. “While the strategic rationale for acquiring the business included opportunities to extend into new verticals and synergies with existing products, the financial burden would have limited financial flexibility. Recall, the deal would have increased net leverage to 3.3x net debt/adj. EBITDA with capacity for approximately half a turn per year of leverage improvement. The termination of the deal saves financial resources that can instead be used to weather the COVID-19 downturn.
“If visibility to stabilization reemerges, the market for acquiring assets could be improved from the position of a potential acquirer. We estimate CLAR exits 1Q with $1.7 million cash and $11.4 million borrowings under the existing $60 million credit revolving credit facility, which has potential for total revolving and term loan commitments of up to $150 million. This is before any fees associated with the transaction prior to its termination. We do not believe Clarus will be on the hook for a significant breakup fee given the deterioration of market conditions and S.K.B. fundamentals.”
The dissolution of the deal speaks to the ongoing M&A headwinds that SGB Executive outlined in a March article, How To Navigate M&A During The Coronavirus Crisis.
While many deals near the finish line were expected to close, investment bankers, private equity professionals and industry experts said that activity was sure to slow amid the pandemic. Clarus’ agreement to acquire SKB was simply the latest casualty.
“Uncertainty is the killer of everything,” said Nate Pund, a managing director in Houlihan Lokey’s consumer, food and retail group. “When you don’t have any sense of the world, it is very difficult to make an informed decision. If you have bad news, you can deal with that. If you have good news, you can deal with that. But when you have uncertain news, you don’t know what to do.”
In this case, all Clarus could do was pull the plug on what would have been a transformative acquisition. SGB Executive will have more analysis in our next monthly M&A Roundup.
Photo courtesy SKB