Riding the M&A wave – Trend or blip?
By David Gee
So were all those deals good, bad or ugly for investors, employees, consumers and other stakeholders? That’s what we wanted to look at a year – or two – after several boat builders, an RV company, and a powersports company, went on a buying binge.
Malibu buys Pursuit and Cobalt. MasterCraft buys Crest Marine and NauticStar. Correct Craft acquires Bryant Boats. Polaris buys Boat Holdings (Bennington, Godfrey, Hurricane, Rinker). Winnebago purchases Chris-Craft. BRP acquires Alumacraft and forms a marine group. Brunswick gets Power Products. And there are some others.
We had the chance to speak to three CEOs about their purchases, as well as a Wall Street analyst who follows the boating space. Rather than us filtering their comments, we decided to just transcribe the interviews verbatim and put them into a Q & A format. Here they are, in no particular order.
Terry McNew / President and CEO, MasterCraft Boat Company
You could say that the CEO of every boat manufacturing company “builds boats” for a living. But not very many of them have. Actually built boats that is. Not so with Terry McNew. He started his over 30-year career in the marine business at Sea Ray in 1988 as a laminator and chop gun operator before ultimately leading manufacturing and PD&E. He was appointed president and chief executive officer of MasterCraft Boat Company in 2012, having served as president and CEO of Correct Craft from 2004-2006, as well as executive vice president, manufacturing and quality for the Recreational Boat Group at Brunswick. In October 2017, it was announced MasterCraft acquired NauticStar a manufacturer and distributor of 18-28 foot bay boats, deck boats and offshore center console boats. And a year later, in September of 2018, MasterCraft acquired Crest Marine, a vertically integrated manufacturer of pontoon boats.
Boating Industry: Of course, each of these deals are driven by numbers and data and metrics. But there is a soft side to M & A as well. Tell us about that.
Terry McNew: During each one of our acquisitions in the last two years we were not the highest bidder. I know what it’s like to be an employee of a boat building company, and I care about those employees. And I care about the culture. I told the principals at the companies we acquired I am going to make them an offer. It may not be the highest offer, but it will be a fair one for both sides. And I will also give you my commitment that we will honor the legacy of what you have built with your brand.
BI: Continuing that thought, most, if not all, of the companies looking for potential buyers in the recreational boating industry are owned and operated by the founder, or the founder’s family. What does that do to the dynamic of a sale?
TM: If you can make a connection with them, and give them the confidence we will not only respect what they have built, but nurture and grow the brand beyond what they could on their own, then that’s what you are looking for.
BI: The recreational boating business has traditionally been a pretty fragmented industry. Has that appreciably changed with this recent consolidation?
TM: How many companies are there in the recreational boating space? Over 1,000 for sure. Whatever the number is, it’s a big one, and so no, just by doing the math, the recent acquisitions have not appreciably changed the industry. What it has done is centralize some of the larger companies.
BI: Broadly speaking, what are you looking at when evaluating a potential deal?
TM: As a public company, we are not only looking at the products a target company makes, we have to be mindful of an acquisition’s ability to do accurate, fast and timely financial closings every month. Most privately-held companies may not have audited financials, and they likely have smaller financial teams. Entering into the public realm brings an additional set of requirements, and we have to be mindful of that. There’s an additional investment a publicly held company will have to make when they purchase a private company.
BI: Is it fair to say you are always looking for an acquisition, or are there periods when you are more focused and deliberate about it than others?
TM: It’s not unusual for public companies to have a leg of their growth stool be acquisitions. That may vary in volume from year to year, and it has to be balanced with organic growth, but all of this is a function of your strategic plan. We aren’t necessarily “buying earnings,” because Wall Street doesn’t give you any long-term multiple for that. It has to dovetail into a larger strategy that can be executed by the acquirer. I think most CEOs of public companies have some business development executive working to constantly evaluate the market for key acquisitions.
BI: In general, do you think these acquisitions are good for the industry, employees, shareholders, customers and other stakeholders?
TM: As a public company you have to demonstrate certain core competencies. I feel that when we acquire a company we can improve the processes, improve quality, cycle time, make positive changes to the sourcing and supply chain, and add engineering resources. In fact, I think we are exceptional at those things. And that potential synergy is exactly what we are evaluating in the due diligence phase of the acquisition. So these acquisitions can absolutely be beneficial to the quality of the product which is good for everyone, including shareholders, because they expect a return when we spend their money. And it’s ultimately good for the consumer too.
Malibu Boats CEO Jack Springer has vast and varied experience in retail, distribution and manufacturing, and has worked as a management consultant and in turnaround deals. He was the chief integration officer with the Nautic Global Group, where he helped integrate two very different marine companies into the portfolio. Since joining Malibu in 2009, he has boosted distribution, product development and quality, developed a vertical integration strategy and successfully took the company through an IPO. Malibu acquired Cobalt in 2017 and Pursuit in 2018.
Boating Industry: Some time has elapsed now since your acquisitions. Talk a little about how you are feeling about them today.
Jack Springer: From our perspective our M & A objective was to acquire great companies and great brands that we could make better. Cobalt is arguably one of the great brands of the past 50 years. Pursuit is a much smaller company, but also still a very well-regarded manufacturer in the fishing and cruising space. Cobalt was a sales company that manufactures boats. And we saw Pursuit as an engineering company that happens to manufacture boats. We now have the ability to cross-synthesize and take the strengths of our different companies and make the overall company stronger.
BI: Speak to the Cobalt deal specifically if you would.
JS: It has far surpassed what we thought it would be by this point in the first two years. Going into the deal we expected to double their EBITDA (earnings before interest, tax, depreciation and amortization) and that’s what we did. It’s been great that we have been able to do new things such as mine the ability to create more capacity, so we can simply get more boats to dealers.
BI: Please detail the Pursuit deal as well if you would.
JS: We also increased capacity there. In fact, our intent was to double it and that’s what we have done. We had a situation there also where all the dealers needed more boats to sell. We also had some regional challenges in that Pursuit is strong in the southeast, somewhat strong in the northeast, pretty well non-existent in the Mid-Atlantic and there really are no dealers in the Midwest. So we needed to bring out more new product and increase the distribution significantly over time. Part of that effort included the construction of a new building at the Pursuit Boats facilities in Fort Pierce, Florida.
BI: We can talk about these deals in terms of metrics and spreadsheets. But we’re also talking about placing a value on someone’s life work, or many generations of efforts, as well as combining cultures. What about the softer side of these deals?
JS: We are extremely cognizant of that side of the deal. There are a lot of founder-based companies in the boating industry. In the case of Cobalt, with Paxson St. Clair, I told him we were very sensitive to what they had built and what they have created. I said there are likely some things that will change, but all I ask for is a little bit of grace and a little bit of trust and I think you’ll see over time we will be a nice blend. From a culture standpoint, it’s really been remarkable how similar the cultures are. They are both built on integrity and they’re both built on delivering the best customer experience possible.
BI: When you look into the M & A crystal ball, what do you see for the recreational boating industry?
JS: I think the deal making will continue, and I think there is even a chance the pace will pick up. There are still lots of older, founder-based businesses in the industry. Those companies don’t want to go through the next downturn. Of course when that will happen exactly is a big question. So I think there is a little bit of rush from sellers who want to beat that downturn. As a result, there is more discussion out in the marketplace today than there was a year ago.
BI: Let me ask the question a little more pointedly. Are you considering any deals right now?
JS: Absolutely. We are actively considering two deals as we speak. You aren’t going to see us in sailboats, but if an adjacent product category or a sub-product category company came up we would be interested.
Bill Yeargin is President and CEO of Correct Craft, a 93-year-old marine industry company with manufacturing plants across the U.S. and distribution into 70 countries. With his focus on people, performance, and philanthropy, the company has won nearly all the industry’s major awards. And Bill himself was selected Boating Industry Mover & Shaker of the Year in 2016. Correct Craft’s most recent acquisition was just this past April when they purchased Parker Boats; a 55-year-old company that builds premium offshore and inshore fishing boats.
Boating Industry: What were the market conditions that were the drivers for these deals, and do those still exist today?
Bill Yeargin: We tried to begin acquisitions during the downturn and we found that during that tumultuous time there are two types of sellers: 1.) those you could wait out the storm and did not want to sell when the prices were low 2.) those who wanted us to just take their company for free because it was in such bad shape (we had many of these approach us and we chose not to bite). As the economy started improving there were sellers who saw an opportunity to sell while things were better and they could get a higher valuation. They did not want to risk waiting and living through another downturn. As we got further into the growing economy, more business owners decided to sell while some buyers began to feel pressure to do deals to support their growth initiatives and support their stock price. This created a seller’s market with very high valuations that would not normally be supported. It was good for sellers who wanted to sell out to the top bidder. Currently there is a lot of uncertainty in the market. This may create more urgency for sellers but buyers are a little more cautious because of the uncertainty. Buyers are unlikely to pay some of the valuation multiples we have seen the past few years when they are worried about the future market.
BI: Do you expect more such acquisitions in the future?
BY: Yes, there are still a lot of people in our industry who have owned their businesses for decades and are now ready to retire.
BI: The financials are different for each one of these companies and each one of these deals, but we are interested in your overall perspective as to generally whether this is, was, or will be, a good thing for employees, shareholders, consumers, etc? Do larger companies with deeper pockets create better R & D, more buying power, improved ROI, better economies of scale?
BY: This is an interesting question so I will give you a few thoughts:
• Whether a transaction is good for employees and customers is largely dependent on the buyer. Many (probably most) buyers are looking for a company to acquire where they can groom it for a future sale. This creates a situation where decisions can be made that are not good for the employees or customers.
• In every one of our deals we have been able to improve results immediately through economies of scale and providing resources (such as lean six sigma experts) who can immediately impact results.
• The way we do deals is different than some others. We are looking for sellers who want to protect their brand, legacy and employees. In every deal we have done the seller could have sold for more money to someone else but chose us because of our values and long-term view. We don’t have an “exit strategy” when we buy but we do commit to doing our best to protect the seller’s legacy, brand, and employees. Additionally, we encourage the seller to be part of our family long after the deal is done.
BI: In a 2017 Boating Industry blog post you wrote about the M & A activity, you identify something you call the “Seller’s Struggle.” What is that?
BY: The “Sellers Struggle” happens when owners selling their businesses wrestle with choosing between either optimizing their business valuation or selling their business to someone who will care for their brand, employees and legacy. I have dealt with many sellers who have found this struggle to be gut wrenching. A couple reasonable questions include: Why is there a struggle in the first place? Why can’t the same buyer who will protect the brand, employees and legacy pay the top price? In my experience, those that overpay for a company often find themselves having to take more draconian steps to justify their investment. Also, many buyers have a clear exit strategy the day they buy the new company and have high financial targets they need to meet in a short timeframe. Buyers who value the brand, employees, and seller’s legacy tend to be longer term buyers who need to buy right to be able to not only invest in the brand but also weather the business cycle and other inevitable challenges.
Michael Swartz is director of equity research at SunTrust Robinson Humphrey in Atlanta. He specializes in the recreational and leisure sectors, and has covered the marine industry for over seven years.
Boating Industry: What do you see as the drivers for most of these deals?
Michael Swartz: I think there are different reasons behind each of those deals. If you look at the boating companies making acquisitions I think there are some real strategic rationales in terms of product development, cost savings, distribution, and growth opportunities. I think there were strategic reasons behind what MasterCraft and Malibu and Correct Craft did. It’s a little different situation with Winnebago and Polaris. There’s just not much strategic overlap between the RV and powersports and recreational boating markets.
BI: So why did they put their cash to work in this way?
MS: If you look at the industries Polaris and Winnebago are in there simply is not much acquisitive growth to be had. Three RV manufacturers, of which Winnebago is one, generate approximately 90% of industry volume. So there’s not much to buy there, and in some instances there might even be anti-trust concerns now because of the highly-concentrated market structure. On the powersports side, again it’s only a few players who dominate the market, so there’s not a lot to acquire. The one exception might be aftermarket parts and accessories. So instead they both look to the boat segment and say, yes it’s highly cyclical, but it has growth attributes, and it’s a highly fragmented market.
BI: Will this wave of deals happen again?
MS: Winnebago, in particular, has said marine could be a platform for them, and that they could perhaps look to acquire more premium boat brands. In my opinion I don’t think that will be any time soon. I think they will take some time to digest Chris Craft, as they invest in increasing capacity and other things.
As for Polaris, I think a lot of investors were scratching their heads and wondering why they did the deal to buy Boat Holdings for $805 million in an all-cash transaction. They had stated previously they had no interest in the marine market and then they went out and made the acquisition. It caught a lot of people off guard.
BI: Did they overpay?
MS: The question for Polaris is did they just make a late-cycle acquisition of a boat maufacturer at peak market share and margins, and pay roughly 11 times EBITDA for it? That doesn’t look overly compelling from my perspective if that is indeed the case. If there are four or five years of growth ahead and discrete opportunities to move margins higher over time, then maybe that evaluation isn’t so steep. With growth and some synergies then maybe you have paid closer to nine times or 10 times for a premium brand. At a time when other strategic boat acquisitions have been transacted in the 7-10 times range, it still looks lofty, but maybe not quite as over the top as it first appears.
BI: Do you think there will be more activity on the dealer and distribution side of the business?
MS: It will be interesting to see what happens to valuations in the next year or two. There are 2,500 to 3,000 dealers across North America and the two largest operate 60 to 70 locations. So there is a pretty long runway for acquisitions on that side of the boating business. If we do hit a soft patch with the economy, as many are predicting obviously, I think you could start to see some pretty attractive valuations. Those dealer groups with scale, and cash, could actually accelerate their acquisitive growth.
BI: How well do you think these acquiring companies have done in terms of folding new companies into their brand and portfolio?
MS: I think that is something you don’t really find out for a while after the fact. I know companies like to talk about the soft side of the deals, and that there’s a cultural fit, they have the same passion we do, we’re committed to this labor force and the community where the boats have always been built and so on. Those are all things they have to say. We’ll see a couple of years down the line who is really sincere about it, especially if there is a downturn.
BI: What do you see as you look into the future?
MS: Just at a high level it’s an industry that is particularly ripe for consolidation. You don’t necessarily need 1,100 boat builders and 2,500 dealers in an industry selling 200k new units per year. For comparison, the RV industry retails more than two times that amount of new volume annually on a similar-sized dealer base. The cycle is always the big question, but in the longer term, I do see an industry that will consolidate. It has happened in powersports, motorcycle, RV, and other forms of outdoor recreation, and I do expect it will be the way the boating industry eventually evolves.
