Quiksilver is the latest company to see value in bringing a venerable European snow sports company into their growing stable of brands as the company last week announced that it would acquire the Rossignol Group in a deal worth approximately $320 million in cash and stock. The acquisition gives Quiksilver an additional $625 million in annual revenue — boosting total pro forma revenues to about $1.9 billion.
But analysts quickly started to raise questions about the impact of the deal on Quiks bottom line. Judging by Rossignols warning later last week about expected “strong losses” for their current fiscal year, the concerns may be warranted. In addition to the warnings, Rossignols first half-year report released in September, the last time Rossignol reported earnings, showed that net income had fallen 69.7% to 3.0 million ($3.6 mm) on 199.1 million ($241.8 mm) in sales.
The losses clearly were not a surprise to Quiksilver, as company CEO Bob McKnight assured analysts and the media that Quiksilver entered into the deal “aware of whats going on in the business.” Still the assurance did little to ease stress on ZQK shares, which fell 15.6% for the week to close at $29.03 on Friday.
Still, the acquisition will now give Quiksilver a total of 20 brands in its portfolio, including Rossignol skis and snowboards, Hammer Snowboards, Dynastar skis, Look bindings, Lange ski boots, Cleveland Golf and Look clipless bicycle pedals. On a pro forma basis, about 52% of consolidated company sales will come from apparel, while winter hardgoods will be roughly 25% of the mix and golf hardgoods will be 7% of the business. Footwear will contribute 6% of sales and accessories will make up the balance.
Quiksilver currently does 98% of its business in apparel while Rossignol only does about 6% of its business in apparel. Quik management really sees the biggest opportunity in this acquisition in apparel. By leveraging its marketing, sourcing structure, and design team, Quiksilver feels that they can increase this dramatically. “We are doing $50 million (in outerwear) just by having good product and without a mountain brand to carry it through,” said Mr. McKnight.
“It (the Rossignol brand) is very high-end. It is very clean, never gone down market If we can apply the apparel part to it that is where we think we can do some big volume globally.” Launching Rossignol and Dynastar apparel lines are apparently top priorities for ZQK.
The management team at Quiksilver does not see this strictly as a SnowSports move. In fact, they view it as the first step in a move towards “owning” the outdoor sports market. McKnight sees Quicksilver becoming a player in “ surfing, sailing, diving, wake-boarding, kite sailing, it is skateboard, bikes and BMX. It is hiking, mountain biking, camping and golf. And of course it is skiing, snowboarding and everything on the mountain.”
Quiksilver clearly has their eye on the solid performance of several core outdoor brands, and the company is looking for a vehicle to emulate that growth. When asked how big the apparel business could become potentially, Steve Brink, Quiksilvers CFO said, “We do not want to put a number on it today How big is Columbia? How big is The North Face?”
Quiksilver said that it should be showing Rossignol branded product to retailers within a year.
On the other side of the equation, Quiksilver also sees some upside in Rossignols hardgoods infrastructure. McKnight mentioned launching Roxy womens specific skis, which could be the first real brand to challenge K2s dominance of the womens specific ski market. Quiksilver also sees launching DC branded Snowboards, and moving their existing Lib-Tech, Gnu, and snowboard binding production into Rossignols manufacturing facility in France.
BOSS sees this as the area where Quiksilver will need to be very careful. Margins at ZQK have already eroded a bit, possibly due to the DC Shoes deal last year. Fiscal Q1 margins were down 130 basis points in the Americas, but rose in regions where DC revenues are distributor based. Picking up a French production facility will not help the margin line much either, as labor issues and the healthy Euro could cut into any possible upside for its board business. Other winter sports hardgoods companies are leaving France and moving production to former Eastern Bloc countries to help build margins.
There are no major changes planned for Rossignols management team, a team that is currently working with Quiksilvers president, Bernard Mariette, on the first steps of integration. ZQK has also brought in Pierre Niermont, the COO of their Napoli division, to lead the integration team. Following these two steps, McKnight said that adding some “capable, quality people,” into the design and merchandising team for Rossignol apparel is next on the list.
Overall, Quiksilver is predicting an annual top-line growth rate of roughly 10% across all of their brands. In the medium term, the company wants $2.8 billion to $3.4 billion in sales within four to six years. The Rossignol acquisition will be four cents to six cents accretive per share in the current fiscal year due to the fact that the deal will close in June, just before Rossignol realizes all of its profits for the year. ZQK also stated that they expect Rossignol to be “slightly accretive” in 2006, and “significantly accretive” in the years following once the majority of the synergies are realized.
Quiksilver will purchase a majority holding of the Rossignol Group controlled by Laurent Boix-Vives, chairman of the board of Skis Rossignol SA, and launch a public tender offer for the minority shares at $25.50 (19.00) per share. The purchase of the majority holding will be paid for with approximately 30% in ZQK shares and 70% in cash, a portion of which will be deferred. The minority holding will be acquired for cash.
The Boix-Vives family will retain a portion of its direct ownership, an approximate 35% interest, in Cleveland Golf for at least 4.5 years.
