Outdoor MandA Market Heats Up Again

The biggest appears to be the gap between what sellers are looking for and what buyers are willing to pay.

“Valuations have certainly come down off the highs of 2007 and many sellers still think they are worth more than is true based on old-deal multiples,” said Nathan Pund, partner of Silver Steep Partners. ” The deals that will get done are two types, premier, well performing businesses a la Black Diamond that command a premium valuation and are very desirable or very distressed businesses that have to sell or else.” 

The other hurdle keeping buyers from being more aggressive is the uncertain economy. On the positive side, easier access to capital, a recovering equity market, and a healthier economy versus 2009 are supporting a better climate for deals.

“The M&A market is already returning to strength,” said Pund. “We are busier than we have ever been and have six deals we are working on now. The improving economy is helping a lot. The biggest change would be stronger lending by banks for deals AND even more important credit to growing companies. Banks have become very stingy and without that capital it's hard to fuel growth at a faster rate.”
Indeed, most deals in 2009 were either distressed

 situations or moves by companies to divest non-core assets in a refocus on core lines.

“The type of deals I saw get done last year, I’d classify as “desperate” or “troubled” situations and they happened quickly,” said Kira Riedel, owner of CFO Services.

Chris Kampe, managing director of Tully & Holland, said sporting goods companies – – both buyers and sellers – chose to postpone their M&A plans until consumers spending revived.    

 

Valuation Gap Starts to Narrow as Economy Improves…                                  

PE firms similarly pulled back from the market until they could see stabilization and improved debt markets. But Kampe describes sporting goods M&A activity as “healthy again.” With greater confidence in the economy, strategic buyers have returned.  Albeit at lower debt multiples than at the peak, debt markets are open again. And private equity capital is available.

“The valuation gap between buyers and sellers continues to narrow,” asserted Kampe. “Looking at public company valuation multiples, our sporting goods index is trading at nearly 11x EBITDA, up from less than 6x EBITDA one year ago.  Notably, a great deal of this valuation is being driven by strong forward growth expectations.”

One challenge is that while equity valuations have rebounded, the rocky performance of many sporting goods companies over the last year complicates deals with PE players.

“Private equity loves to back healthy companies, those exhibiting strong growth and impressive profit margins,” said Kampe. “Many sporting goods companies suffered both on the top and bottom lines.  The lack of suitable targets, not lack of interest, is really the primary constraint on more private equity backed M&A today.  This will change over the next six months with improving financial performance of targets, but there have not been many private equity backed LBOs since 2008.”
In the near term, he expects to continue to see more strategic buys.
“Healthy sporting goods companies, with cash or debt capacity, have been taking advantage of reasonable valuations and, in many cases, strong seller motivations, to expand their brand portfolio or product line, take a competitor out of the market, or gain new distribution into new geographic markets,” said Kampe.

Indeed, in the outdoor space, Clarus Corp., a former Internet company that just absorbed both Black Diamond and Gregory, has transformed itself and announced intentions to become a major consolidator in the outdoor equipment and lifestyle markets. Isis (acquired by Kellwood) and Lendal (bought by U.K.-based Celtic Paddles) were also both strategic deals. Other possible strategic buyers in the space – VF Corp., Jarden, Columbia Sportswear, Deckers Outdoor, Timberland, Wolverine World Wide – haven’t been active over the last year but are better positioned to handle deals as most of their stock prices have doubled over the last year.

Riedel was likewise encouraged that the M&A climate has improved so far this year. She has met many private equity firms who have formed funds specifically for investing into or acquiring brands in the outdoor industry that represent a “great value due to recessionary factors.” On the other side, she has spoken with strategic buyers that are finally mobilizing to look for acquisition opportunities with the same “great value” due to recessionary factors.  But she still thinks although valuations have improved, they remain depressed and that may frustrate deals.

“I think there is a perception of big value and buy side opportunities in the market, as the recession shakes out,” said Riedel.”Therefore the typical deals of the past at mid-range valuations based on steady cash flowing companies who have built a solid brand may not be there yet or at least. If that was my company, this is still not the year I’d choose to sell, if I had a choice. “

Robin Smith, principal at Sport Ventures LLC, said 2010 “looks better but not dramatically better” for M&A activity. Restraining deals will be the sluggish European economy as well as the extent of the U.S. economy recovery.

“I expect an slowly improving M&A market as strategically strong companies get their feet on the ground in their own businesses and begin to look seriously for  weakening companies (with heritage brands) or the emerging star,” said Smith. “Private equity still has a lot of sideline capital and the clock continues to tick toward the sunset date for many funds.”

Smith said the arrival of a few deals with healthy EBITDA multiples would help accelerate M&A activity.

“I would expect the EBITDA multiples to rise a bit, but not by much in 2010,” said Smith. “Everyone has a chest of cash and pressure to use it either for growth or to employ.  Right now there are not a lot of good deals from what I see.  That could change however as 2010 rolls along.”

Kampe said healthy companies with strong brands, solid growth, healthy margins and strong underlying sports participation rates will secure vibrant interest and robust valuations.  Without these factors, valuations are lower and it's more hit or miss.

“The issue is really that sales and profits for many would be sellers are depressed due to the recession or other reasons,” said Kampe. “But, their valuation expectations haven't changed from the peak.  So they must wait until their sales start growing again and their margins recover to hope to get closer to their peak valuations. So it's not one size fits all. Valuations are not universally depressed, but subpar businesses are being priced accordingly.  At the peak, these valuations get over priced.”

Pund said sellers should recognize that there's no guarantee that valuations will return to old high multiples of 2006 and 2007.
“A deal should be driven not by timing but by desire and objective,” said Pund. “If the business is ideally positioned to grow and could do it at a faster rate under a new owner, capitalize on that strength and take advantage of getting a deal done. If don't need to sell, then don't.”