Clarus Corp.’s executive chairman and largest shareholder, Warren Kanders, submitted a non-binding bid to acquire the company’s Precision Sports segment, which includes Sierra Bullets and Barnes Bullets brands, for $160 million. Analysts said the deal hinges on whether Clarus will likely receive a higher stock multiple as more of an outdoor-focused company.
The company disclosed the offer in a regulatory filing, including a letter from Kanders stating why it would benefit Clarus.
In the letter, Kanders, who owns 15.4 percent of Clarus’ shares, wrote that the offer would provide “immediate financial flexibility” for Clarus with the cash proceeds to the company exceeding existing obligations for bank debt.
The offer is expected to consist of $140 million in cash available at closing and $20 million pursuant to a seller note.
Clarus, Kanders added, would then reposition around its two remaining businesses – the Outdoor segment (Black Diamond) and Adventure segment (Rhino-Rack, Maxtrax). Each recently overhauled their leadership.
“I believe that the proposed transaction will bring significant near-term value to shareholders and enable the company to focus on its attractive organic growth initiatives in its Outdoor and Adventure segments where it has excellent leadership in place with Neil Fiske and Mat Hayward, respectively,” wrote Kanders. “Without the constraints of leverage, the company will be free to pursue strategic and accretive M&A opportunities.”
Kanders said that without the Precision Sports segment, Clarus would also avoid the “added regulatory and political scrutiny that comes with also operating” an ammunition business.
Kanders did not request an exclusivity commitment from Clarus and said he expected the company to explore any alternative transactions as a definitive agreement is negotiated. Kanders said he is prepared to enter a definitive binding agreement within the next 30 days, with the transaction’s targeted closing by the fourth quarter. He urged Clarus’ board to form a special committee of disinterested and independent directors to consider the offer or any other transactions should they arrive.
The offer comes as shares of Clarus have declined over the last two years as all of its businesses were negatively impacted by elevated inventories in the marketplace tied to supply chain challenges and weakened demand.
On August 7, Clarus Corp. trimmed its outlook for the year after reporting second-quarter results fell below analyst expectations due to promotional pressure and prolonged inventory de-stocking. Sales were down 27 percent, sliding 24 percent at Black Diamond, 27 percent at the Sierra/Barnes ammunition segment and 34 percent at its Adventure segment.
Shares of Clarus first faced pressures last fall due to challenges in its Adventure segment caused by shortages of new vehicles in the marketplace due to supply chain disruption. It also started facing reduced open-to-buys for Black Diamond due to broader excess inventories in the outdoor space that remain elevated.
The deal also comes as Clarus has recently overhauled its management team. John Walbrecht, the company’s president since 2018, stepped down on March 31 in mutual agreement with the company. On February 2, Neil Fiske was appointed president of Black Diamond. Fiske is the former CEO of Eddie Bauer and Billabong International. He was, most recently, CEO of Marquee Brands, the parent of Dakine, Body Glove and 11 other brands.
The company hired Mat Hayward in March to run its Australia-based Adventure business. He was previously the chief marketing and new business development officer at R.M. Williams, the Australian boot brand. He also held marketing roles at Seafolly, Deckers, Quicksilver, and DC Shoes in the APAC region.
Shares of Clarus were up 38 cents, or 5.4 percent, to $7.30 in late-afternoon trading Monday after beginning the year at $7.84. Shares had jumped to an all-time high of $32.36 in August 2021 when outdoor product demand was well above supply during the pandemic.
Among analysts reacting to the news, Joseph Altobello at Raymond James reiterated his “Market Perform” rating on the stock. He said that the removal of Precision Sports “would perhaps make a takeout of CLAR more palatable, given that it would result in a much-improved balance sheet,” as well as overcome the “hesitancy of some strategic and financial entities to invest in firearms or ammunition companies.”
Altobello noted that the proposed terms of the deal value Precision Sports reasonably close to the businesses’ public-held peer, Vista Outdoor. However, he said that the Precision Sports business had historically been “far and away” Clarus’ most profitable business, generating $45 million of its $63 million in adjusted EBITDA last year, with a segment EBITDA margin north of 34 percent.
Altobello also noted that the Precision Sports business should see a decline in earnings this year. Raymond James’ EBITDA forecast is $32 million “owing to several issues, including challenges in procuring brass casings and inventory rebalancing.” The firm expects EBITDA to then improve to $35 million in 2024.
At Roth MKM, Matt Koranda said the transaction would improve Clarus’s balance sheet, and the potential for strategic or other bidders arriving for “an attractive asset in the shooting sports industry” would be even more favorable. However, Koranda said Clarus’ investors would “need to assume a decent multiple re-rating for this to be accretive to CLAR stock,” and that largely depends on investors’ view of the remaining Outdoor and Adventure businesses.
Koranda said he’s maintaining his “Buy” rating at a $9.50 price target pending developments.
B. Riley’s Anna Glaessgen reiterated her “Buy” rating at an $11 price target. She wrote, “Sierra/Barnes are attractive businesses from a margin and cash flow standpoint, and CLAR has grown the segment significantly through the application of the ‘innovate and accelerate’ playbook. That said, a highly volatile industry and the hurdles to ownership for many investors (ESG implications) make their operation within a public company challenging. Plus, the company purposely limited synergy between the businesses, operating them largely independently to prevent the loss of the individual brands.”
Glaessgen said that while a sale would lead to “significant model implications,” she believed Clarus’ multiple should expand as the company shifts to a pure outdoor equipment company, assuming the deal goes through. She wrote, “Ultimately, we see greater capacity for investment in growth opportunities such as revamping the Black Diamond apparel line as a positive.”
At Stifel, Jim Duffy wrote that he believed the deal “under-values” the Precision Sports business and shows that Clarus’ current valuation is attractive. He noted that Stifel’s multi-year, sum-of-the-parts financial model “suggests CLAR shares are under-valued both operating the current portfolio and with the potential divesture of the Precision Sports business. We expect shareholders to decide against the offer.”
Duffy reiterated his “Buy” rating at a $13 price a share target.
Photo courtesy Sierra Bullets
