In the second significant outdoor industry acquisition in as many weeks, Timberland inked a definitive agreement to purchase all of SmartWool’s outstanding stock from two private equity investment groups for roughly $82 million in cash. SmartWool’s 2005 revenues are expected to be $42 million.

This deal is one of the largest the outdoor industry has seen in quite some time with Timberland paying almost two times revenues; however sources close to the deal say that SmartWool’s profitability is the main reason behind such a high valuation. Timberland is not revealing any profit numbers for SmartWool, but the EBITDA multiple was said to be “on the high end… but not on the extreme high end” of other industry deals. However, even with 20% operating margins, the price tag is roughly 10X EBITDA, surpassing every outdoor apparel deal in the past three years.

Chip Coe, SmartWool's president, told BOSS that Timberland is committed to keeping SmartWool as a separate entity, and they will likely use their Steamboat Springs facility as a Rocky Mountain research facility for the development of new Timberland outdoor footwear and apparel in addition to SmartWool’s day-to-day operations. Coe also said that all “customer facing activity” will remain the same, including the sales force and customer service. The synergies will be in back-end systems and order fulfillment.

There will also be opportunities to collaborate on Asian sourcing, but SmartWool’s core sock manufacturing, which is domestic, will remain the same. SmartWool is also looking forward to having access to Timberland’s design and testing facilities in New England.

The main opportunity for SmartWool is, like so many other acquired brands, international expansion. Timberland owns roughly 500 retail stores internationally and has access to international distribution channels beyond SmartWool’s existing infrastructure. While Timberland will maintain SmartWool’s existing distribution for its core sock products domestically, they do see the opportunity for a more segmented distribution strategy, especially with SmartWool’s new casual sock line.

During a conference call with investors and the media, TBL management said that SmartWool has a “very clear view of the value of selected distribution and a powerful approach to putting the brand in the right venues,” and Timberland intends to maintain this. However, the company also sees SmartWool’s casual line telling a very effective story in better department stores, like Nordstrom’s and Marshall Fields and mall retailers like The Walking Company.

SmartWool’s management team will report to Timberland’s SVP of supply chain and GM of the Performance Outdoor Division, Gary Smith.

In an exclusive interview, Mr. Smith told BOSS that part of Timberland’s proposed growth strategy for the brand is to expand its apparel offering in two ways. First, the company will take an ‘Intel Inside’ approach to the SmartWool brand with TBL apparel, similar to their approach with the Power Lounger footwear launched at OR Summer Market. Essentially, Timberland will be using SmartWool’s Merino wool technology to enhance their apparel line and tell a performance story in some of their higher-end apparel. Again, Timberland is going to be very careful about SmartWool’s distribution, even with this Timberland branded apparel. Management said that SmartWool has had the veto on distribution from the beginning with the Power Lounger line and will continue to have that right after the acquisition is complete. While explaining the deal and the brand to Wall Street analysts, Timberland said repeatedly that they want to “build the brand slowly and powerfully,” without sacrificing its current distribution.

The second opportunity is for SmartWool to build their apparel line beyond base layers. The company wants to look at second and third layer product opportunities. Mr. Smith pointed specifically to Merino sweaters and insulation products in addition to Merino-based soft-shells. Timberland’s CEO, Jeffrey Schwartz clearly sees opportunity in building upon the natural technology currently in SmartWool’s base-layer offering. During a conference call with analysts and the media he said, “There is an opportunity for us absolutely in the base-layer world… We think it is possible to build this technology — this natural technology — into more exciting and more adrenaline-filled opportunities.”

For Timberland, this acquisition also signifies a departure from the company’s traditional strategies. Just over a year ago, the company began the process of trying to regain its market share in outdoor specialty retailers. While the company has made some considerable headway, it has yet to be considered a core outdoor brand by many retailers for either performance or lifestyle product.

Timberland shifted its thought process with the launch of its first non-Timberland product line when it partnered with Martin Keen to design and develop the Mîon brand. Now with the SmartWool acquisition, it is expanding its multi-brand strategy even further. Mr. Smith told BOSS, “This [multi brand strategy] in no way signifies that the Timberland brand is not strong in outdoor, but as a singular brand you won’t get a full collection placed in a sports specialty or outdoor specialty store. Through this distribution channel, in order to have product on the hiking wall, the trail running wall, on the lifestyle wall, and the watersports wall you just need multiple brands.”

Smith also said that Timberland is still proactive on the acquisition front, but the company does not have an “explicit strategy” to build a large portfolio of brands. “We are certainly not serial acquirers like K2 or VF Corp., but we are still open and active, even proactive. During this process we talked to a number of companies and we will continue to talk. We won’t let an opportunity pass us by.”

>>> Both companies see a lot of opportunity here, and culturally this is a great fit, hopefully the high price tag won’t bring the wrath of Wall Street down on a good deal.