Black Diamond, Inc. entered into a definitive agreement to acquire POC Sweden AB (“POC”), a Stockholm designer and manufacturer of protective gear that executives said will almost immediately accelerate margin and sales growth.
POC marks the first acquisitions by BDE since it went public in 2010 in a reverse merger with a public shell that enabled it to simultaneously acquire backpack maker Gregory Mountain Products. BDE reported sales of $145.8 million in 2011 and is forecasting sales to reach $160-$165 million this year.
Founded in 2004, POC produces and distributes advanced-design helmets, body armor, goggles, eyewear, gloves and apparel for action or “gravity sports,” like skiing, snowboarding and cycling, with a particular emphasis on safety and protection.
In a conference call before BDE’s annual meeting in New York City, CEO Peter Metcalf outlined how POC meets all six of BDE’s criteria for acquisitions, including sales of at least $25 million. While POC’s unaudited total revenues were approximately $22.5 million for its fiscal year ended April 30, its sales grew 35 percent over the prior year despite an exceptionally warm and dry winter worldwide. POC’s prowess at research and innovation has earned its numerous awards,it has defensible patented technology, strong distribution in Europe and strong brand equity.
“It’s technical, its core, it’s edgy, it’s trendy, it’s beautiful and it’s growing,” said Metcalf. “This allows Black Diamond to grow in cycling and action sports.”
Metcalf asserted that, like BDE, POC’s brand footprint is larger than its sales foot print, meaning that it has a global presence well beyond what its sales might imply. This is due in part to the company’s pioneering MIPS technology that essentially mimics the mechanics used inside of the human skull to protect the brain from oblique impacts. The technology works by placing a low friction layer between the shell and liner of a helmet that allows the shell to rotate slightly when subjected to oblique impacts, which account for the majority of sports head injuries. The company’s helmets, which are sold in 27 countries and at rei.com, are endorsed by three of the world’s top downhill skiers.
“It’s rare for a company this size to already have made such an impact on the global market place. We can take it beyond $100 million easily,” said Metcalf, whose plans for BDE include growing sales to $500 million by 2015 through $104 million in organic growth and $250 million in acquisitions. “We are psyched beyond belief and thrilled to make this game changing acquisition.”
Talks between the two companies began in February, 2011 when BDE executives cold-called the Swedish company after conducting research. POC founder and CEO Stefan Ytterborn visited BDE’s headquarters in Salt Lake City in August and quickly understood that POC could grow much more rapidly and inexpensively by bolting on to BDE’s global infrastructure. Rather than make a substantial equity investment in the company to build up its global IT and other infrastructure, POC’s non-employee shareholders opted to take some cash and stock in Black Diamond.
“By bringing POC onto Black Diamonds global platform, we can grow POC quickly and significantly without meaningful new investment,” said Metcalf. After acquiring Gregory, BDE was able to launch the brand in Europe within a year for an investment of less than $1 million. Gregory executives had estimated the launch would have taken them five years and cost them $5 million.
Under the terms of the definitive agreement, Black Diamond will purchase POC for SEK311 million, or approximately $43.5 million. At closing, Black Diamond will deliver approximately 460,000 shares of BDE common stock and approximately $40.0 million in cash depending upon the SEK/USD exchange rate at closing. Black Diamond has committed an additional estimated $12.5 million payable in a series of significant, long-term, performance-based incentives payable to management, structured as compensation, with multiple measurement and payment dates over a six and a half year period. The expected total of $12.5 million in compensatory incentive payments are predicated upon aggregate POC contribution margin expected from a 30% compounded annual growth of POC’s revenue. Any such performance payments shall be offset by gains imbedded in the vested portion of an employee stock option pool comprised of 500,000 options with exercise prices ranging from $13.00 to $16.00 per share.
“A 6.5-year earn out is a very long time period, one of the longest typically used,” noted one investment banker active in the outdoor space. “That said, such an earn out provides a win-win situation in which the buyer can share the risk of future success with the seller.”
The extended period makes particularly good sense given how economic turmoil in the Euro Zone has complicated the task of forecasting sales there.
The common stock to be issued at closing is subject to a lock-up agreement restricting sales for two years and will be pledged to Black Diamond as security for indemnification claims under the definitive agreement. The transaction is expected to close in June 2012 and is expected to be accretive to Black Diamond earnings per share in 2013. Metcalf said the deal leaves BDE with enough credit on its revolving line of credit to pay for another similarly sized deal this year if the right opportunity arose.
BDE could take over POC’s U.S. distribution subsidiary as early as this fall and transfer POC’s European sales operation in Austria to its Swiss headquarters by spring 2013. POC will retain responsibility for product development, marketing and branding at its offices in Stockholm. Supply chain and other synergies are also likely longer term.
“Partnering with a highly capable and energetic company like Black Diamond greatly enhances our ability to better serve our worldwide community of users,” said POC founder and CEO, Stefan Ytterborn. “In Black Diamond we have truly found our match in terms of ‘hearts and brains.’”