When Reebok International didnt get a place at the table in last years action by MLB Properties to provide licensing rights to seven companies in long-term exclusive deals, there was a great deal of speculation that the worlds third largest athletic brand would simply buy Majestic Athletic, the licensed apparel company that snagged the coveted on-field deal (SEW_0332).
Well, Reebok decided to go on-ice instead in a deal announced last week that will see the company acquire The Hockey Company Holdings for C$21.25 per share in cash, or US$204 million based on current exchange rates. RBK will also assume $125 million of THC debt in the acquisition deal that will give the company three venerable hockey brands in CCM, JOFA and KOHO. The deal should not be a strain on the Reebok balance sheet. The company ended the 2003 fiscal year with nearly $694 million in cash and total borrowings of $361.5 million.
The Hockey Company inked a deal a year and one week ago with the National Hockey League for the “exclusive rights to supply and market all Center Ice authentic apparel, including team uniforms, practice gear, headwear and locker room apparel for the players and team personnel of all 30 NHL Member Teams” through 2014 (SEW_0314).
The Hockey Company Holdings was formed in June last year in an IPO that raised C$72 million to pre-pay certain royalty payments to the NHL and to re-purchase all of the outstanding Preferred Stock of The Hockey Company. The NHL deal provided the league with stock options in the new entity and royalty guarantees that equaled about 60% of the IPO proceeds.
In an exclusive interview with Sports Executive Weekly, Matt OToole, president and CEO of The Hockey Company said the NHL had “given its consent” to the deal and that the NHL options automatically vest in the change in control. OToole said its recently-inked deal with the AHL doesnt provide for any equity stake.
The NHL deal is central too much of the upside here and that may be impacted by a looming work stoppage in the league this coming fall.
THC said after in its fiscal 2003 conference call (SEW_0408) that it sees little potential impact to its equipment business in 2004 from a potential NHL work stoppage, but we would expect the apparel end of the apparel business to surely take a hit if the league and the players cant agree on a new collective bargaining agreement that is due to expire in September.
THC should know by May 18 if they should put a hold on apparel production, which is the deadline for the NHL to inform the players association of its intention to terminate the existing deal.
The NHL had released a report that its 30 teams combined for $272.6 million in operating losses last season, but the NHL Players Association immediately challenged the results. The league is also contending that players got 75% of operating revenue last season, up from 57% in 1993-94.
Poor NHL television ratings are reportedly giving the networks pause and the league will be cut back to cable coverage only in the United States in the very near future, further limiting revenues.
Despite the looming shutdown, THC management was still predicting that overall company results woulc “continue to be solid and profitable”.
Mr. OToole said Friday that The Hockey Company will remain based in Montreal, but will look to Reeboks On-Field operation in Indianapolis to help provide better Quick Response opportunities and build efficiencies in the U.S. business. The U.S. business declined 3.3% last year. OToole said that Reeboks brand strength and supply chain expertise to help THC further grow its business in the U.S., Canada, and Europe.
The supply chain piece may certainly help on the Apparel side, which made up about 29.6%, or $71 million, of THCs sales in 2003, but the upside for the much larger Equipment business, which grew almost 18% last year to $166 million, or 70.4% of the business, is doubtful. The Hockey Company may benefit from Reeboks boots on the ground in Asia, where their Apparel sourcing people have a clear advantage over THCs current sourcing group based in Montreal.
Mr. OToole said that The Hockey Company currently manufactures 55% of their goods primarily hardlines in their own facilities in Canada and Europe. THC has two plants in Europe and four remain in Canada.
The CEO pointed to the collaborative deal between the two companies ten years ago as an example of how the Hockey Company plans to benefit from the Reebok deal on the Equipment side of the business. CCM released a skate that utilized Reeboks “PUMP” technology first introduced in basket ball shoes. Access to Reebok extensive patents and IP was seen as a major plus in the deal.
Wellspring Capital Management, which reportedly owns about 25% of HCY shares, stands to make out very well in the deal. They reportedly invested approximately $28 million for a controlling stake in April 1997, a position that is now worth almost $54 million in the Reebok deal.
Reebok officials said that the deal is not expected to be accretive to earnings in 2004, but “Depending on the results of the NHL's current labor negotiations”, the acquisition could be accretive RBKs 2004 earnings per share in the range of five cents to a dime.
>>> We have to wonder if there is a flip in the works here. If THC wants to truly see improvements in sourcing and the supply chain, the larger Equipment end of this deal really belongs elsewhere, like Carlsbad maybe???
