Thursday, November 15, 2007

Nail In the Coffin?

Dorel Looks at Buying Cannondale

MADISON, WI (BRAIN)—With the Canadian “loonie” at near record levels against the dollar, rumors are rife that Canada’s Dorel Industries, which owns Pacific Cycles, is kicking tires and weighing frames as it ponders a purchase of Cannondale.

Those rumors have spiked of late but Jeff Frehner, Pacific’s president and chief executive officer, said at this point they are just rumors. A call to Cannondale’s Matt Manley remains unreturned.

Frehner said Pacific wants to bolster its IBD investment and that could include a purchase of Cannondale or others. “They (Dorel) are committed to spending money on that segment,” he said. Frehner, recognizing that some specialty retailers worry about Pacific’s position in the mass market, said Dorel could look at setting up a separate company focused solely on IBD sales of GT and other brands. Pacific, which has had modest success selling Schwinns to IBDs, could add Schwinn to its IBD mix.

Nonetheless, Cannondale has been for sale for months. And Pegasus, a private equity firm, has been hard-pressed to find a buyer. The original asking price was pegged at around $200 million, but few think Pegasus will get it. Given the Canadian dollar’s position against the U.S. dollar, a Dorel purchase could yield an effective discount off the final negotiated purchase price.

Pegasus bought a bankrupt Cannondale in January 2003 for approximately $58 million. The fact that Cannondale also owns Sugoi, a Canadian clothing company it bought in July 2005 plus a licensing agreement with shoemaker Diadora, makes for a more complicated sale.

Dorel, a publicly traded company in Canada, is sniffing around for acquisitions and Cannondale is one of them, according to Canadian analysts who track Dorel and rate it as a market performer. Dorel enjoys annual sales of $1.8 billion and employs about 4,700 people worldwide. It’s also considered a savvy manager of logistics with extensive experience in Europe and Asia.

The company currently is generating ample free cash flow for a purchase even as it aggressively reduces debt. It generated some $70 million during the first nine months of this year. And Pacific Cycle, part of Dorel’s recreation and leisure group, is also performing well. Revenue was up 9.6 percent to $288.9 million while earnings from operations rose 35.2 percent to $27.1 for the first nine months of the year.

Currently, GT is positioned in the United States as an IBD-brand only while Schwinn is sold through mass merchant, sporting goods and specialty retail channels. Mongoose, while also sold in all three channels, is the leading BMX brand in the UK.

—Marc Sani


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