Earning season started with a bang this year as Jarden Corporation, the parent company to Coleman, announced that it has signed a definitive agreement to acquire K2, Inc. While the initial reaction from many in the industry was, “WHO is acquiring K2?,” Jarden first entered the outdoor game two and a half years ago with thte Coleman deal. JAH acquired American Household, then the parent company to Coleman, in September of 2004. Since then, the team at Jarden, led by CEO Martin Franklin, has proven their merit by returning Coleman to profitability and ramping up innovation at the same time.
Jarden will pay $10.85 per share of KTO common stock in cash and will issue 0.1086 of a share of Jarden common stock for each share of KTO common stock outstanding as of the closing. The cash and Jarden stock to be issued in the transaction has a combined value of approximately $15.50 per K2 share, or $734.7 million. The total enterprise value of the transaction, including the assumption or repayment of K2's indebtedness, is approximately $1.2 billion, or roughly 14x K2s 2006 EBITDA and 0.9x 2006 sales.
The merger agreement has several standard conditions to close, such as regulatory clearance and a vote of K2 shareholders. There is also a break-up fee if the deal is not consummated and Jarden has the right to match any alternative proposal that may arise.
It is anticipated the transaction will close in early July. Jarden expects K2, Inc. to be accretive to 2007 results, excluding the impact of reorganization and acquisition integration costs.
Jarden and K2 have been in discussions relating to this deal for over a year. “(We) spent time with the entire senior management team of K2 understanding their businesses and the prospects for growth and margin expansion in the combination with Jarden. We have visited the significant operating and manufacturing locations of the K2 business worldwide, and anticipate a smooth integration into Jarden's operating culture,”
Franklin said during a conference call with analysts. “The opportunity here is on two levels. At the retail level, it's in the specialty space and in the international channels. On the specialty side, I mean, there are some specific opportunities where we really do bring things to the table for K2, and there are some specific opportunities where they bring opportunities to us.”
Jarden laid out several specific examples of opportunities going forward. First, management feels that K2's apparel team can be leveraged to produce Coleman apparel. Jarden currently has no apparel capabilities in-house, but management said that apparel is a category they are willing to spend time, money and effort on growing.
K2's Shakespeare and Penn brands will likely complement Jardens recently acquired Pure Fishing business, which adds an existing strength in freshwater tackle and bait to K2's strength in salt water rods and reels. Coleman has also been working on growing its business in the higher-end marine market. The addition of Sterns and Sevylor were said to be the “perfect fit” for Colemans coolers, cordage, and accessory products sold in this market.
Jarden currently does not do business in snow sports or team sports, and no synergies between these segments and Jardens existing structure were mentioned during the conference call discussing the acquisition.
Once the K2 deal closes, the Outdoor Solutions segment will be Jardens largest operating segment with roughly 46%, or $2.6 billion, of the companys anticipated $5.6 billion in revenue. Jarden management expects that the addition of K2 will also move the company into the ranks of the Fortune 500, and, assuming the deal closes, the board of directors will implement a three-for-two stock split the fourth split in five years for the company.
From the K2 perspective, the fit between the outdoor brands is looking positive. “If we were going to pick two businesses that we thought would be perfect fits for us in the retail channel and give us the kind of leverage we'd want to have in that channel, they were Coleman and Pure Fishing and we tried to buy them both and just didn't have the capital structure to do it,” said K2 chairman, Dick Heckman. “The retailers want bigger, stronger, fewer vendors and they want quality branded vendors.”
Heckman said that K2, Inc. is about two-thirds finished integrating the acquisitions it has done since 2003 and still has some margin up-side ahead. KTO currently has 9% EBITDA margins and Jarden management feels that it can improve these by 200 to 300 basis points. In addition, the company feels there is $25 million to $50 million in cost savings at K2, Inc.. These savings will come primarily out of corporate expenses, but will also include the fishing and marine businesses, distribution and sourcing and manufacturing.
K2s current strategy of having 20% of their sales from products which were introduced in the previous 24 months will continue under Jarden. At the same time, Jarden will bring greater resources to the table in marketing, merchandising, and logistics. In particular, Franklin highlighted the marketing synergies available between the brands and the need to grow not only Jardens size, but also the size of the outdoor marketplace as a whole.
“I will say this; we spend a lot of money on Coleman right now in our advertising and marketing campaign to promote active lifestyles and outdoor lifestyles. And obviously, to the extent people are doing more recreational activities in the outdoors, that revenue opportunity spreads across all of the products that K2 produces, so we see it as a sort of macro fit,” said Franklin.
Finally, Jarden does not foresee any additional acquisitions in the Outdoor Solutions segment and the company will likely take a breather from deals in any other segments, as well. Jarden did say that K2 management will be joining their team, but no details were provided concerning who will be in charge of the Outdoor Solutions segment, which is currently run by Coleman president & CEO Gary Kiedaisch.
>>> Now instead of asking, “Who will K2 buy next?” the question is, “Which brand outside the outdoor business will Jarden sell off first…”