Posted by Editor on 06/23/98
QUESTOR / SCHWINN BUYS GT
(courtesy the Coffrin Group)
Questor Partners Fund, L.P. , the owners of Schwinn Cycling & Fitness Inc., announced today (June 22, 1998) that an agreement has been reached for the purchase of GT Bicycles, Inc. (Nasdaq: GTBX). Questor Partners Fund is a Michigan based privately held equity fund established in 1995 to acquire under-performing or 'special situation' companies.
GT will operate as a subsidiary of Schwinn, with top management reporting to Schwinn CEO Tom Mason. Questor will pay US $8 per share for all outstanding common stock of GT - about 10 million shares. The transaction is subject to approval by stockholders of GT and regulatory agencies and certain other terms and conditions.
Bain Capital and certain affiliated funds, which own 22% of GT, have agreed to vote their shares in favor of the proposed merger. The transaction is expected to be completed in the third quarter of 1998.
GT sales in 1997 totaled US $217 million. GT bike brands include GT, Powerlite, Robinson and Dyno. Its Riteway Products division sells numerous brands of bicycle parts and accessories.
COFFRIN GROUP ANALYSIS.
This announcement comes at the start of the important pre-season sales activities for 1999 products. Representatives selling brands competing against GT and Schwinn will try to paint doomsday scenarios about why one brand or the other will deteriorate or, worse yet, be taken to the mass market.
Questor, to reassure GT and Schwinn dealers, will attempt to place a spin on this story that it will be pretty much business as usual for the two companies. And, with respect to the companies' interface with USA dealers, that will be largely true for the next several months.
Coffrin Group predicts that Schwinn will speak 'softly' to lessen expectations for radical change. After watching Brunswick promise - and fail to deliver to date - significant changes after its purchase of Mongoose, Schwinn has probably learned to diminish industry expectations for change, not inflate them.
This acquisition seems to announce that Questor is the only company making bold financial moves in the specialty retail segment of the USA bicycle industry. The combined sales of GT and Schwinn will approach US $400 million this year, with more than 55 percent coming from GT. The combined sales volume may make Questor the volume leader in the specialty retail channel in the USA. If you exclude Schwinn's fitness sales, the bicycle revenue for Questor should be in the same range as Trek's total sales, and probably a bit higher.
Why was Questor interested in GT? And, interested enough to pay $80 million plus assumption of GT debt?
GT brings several strengths that compliment Schwinn's position in the market:
1. GT has strong international distribution, Schwinn has almost none.
2. GT is the USA market leader in juvenile bikes.
3. GT has strong USA manufacturing capabilities.
4. GT has much larger parts and accessories sales than Schwinn.
5. GT has a significantly larger number of USA accounts.
6. GT owns 50 percent of Charger electric bikes, builders of products that appeal to the aging boomers who most respect the Schwinn name.
Questor acquired Schwinn in September of last year, and has not promised or made revolutionary changes there. Our analysis is that Schwinn CEO Tom Mason is largely satisfied with the 'brain trust' he has at Schwinn. The Schwinn team of Hess, Bagni, and Pippin has done amazingly well in a flat industry with compressed margins.
Coffrin Group does not believe Questor will take a Schwinn bike line to the mass market channel of distribution. The mass merchant channel is a cut- throat, price driven, commodity market. Schwinn would find it hard to gain more profits in the mass channel than they risk loosing in the specialty retail channel.
Our expectations are that Questor is most likely to make significant changes to companies it acquires to compliment Schwinn, rather than Schwinn itself.
Coffrin Group has predicted in the past that Schwinn might try a strategy of selling strictly juvenile products to the mass sector and hope it does not lose the loyalty of its USA bicycle dealers. One could argue, however, that the GT name is the juvenile name that is most asked for by kids, and that it might be worthwhile to consider expanding the sales of GT BMX products to the multi-sport, big box retailer, and mass merchant channels.
The question Coffrin Group keeps asking is, 'How does Questor intend to make a good return on its investment in GT?' In an industry with declining sales on a per capita basis and margins so slim that breaking even is an accomplishment, why would anyone spend over US $80 million for a bike company?
To make a strong return on its investment, Questor will have to take bold moves. Questor must either: a) Redefine the rules of the game so bicycle profits can improve, or b) Play a new game or games.
OK, maybe, just maybe, there can be some economies resulting from combining the operations of GT and Schwinn - for example, credit and warehousing can perhaps be consolidated. However, these gains from combining operations sometimes never happen, and never happen quickly. And, face it, these small adjustments to P & L statements could not give Questor anything resembling the 25 percent return on investment that equity funds typically seek.
Questor, with knowledge gained from its Schwinn acquisition, must have a supporting rationale for its acquisition of GT that is not yet apparent. There has to be some strategic reason for the acquisition other than 'bigger is better.' And, that strategy must call for big changes in order to get big profits.
Some industry observers though that Brunswick was naive when it paid $212 million in cash for Roadmaster's brand name and its two USA plants...especially since the seller was on the brink of bankruptcy. But, it is unreasonable to think that Questor is naive in making its acquisition of GT.
Expect bold moves from Questor, big changes to Schwinn and/or GT to improve earnings. It will be fun to watch the actions of both Schwinn and GT. And, it is reasonable to expect Questor to make more acquisitions in coming months.
EditorÃ¢â‚¬Å¡s Note: In Canada the Schwinn brand is distributed by Veltec Canada (Toronto-based) and GT-Riteway by MarrÃ¢â‚¬Å¡s Leisure (Winnipeg head office, with bicycles based in Scarborough). Questor has made no change to their Canadian Schwinn distribution since taking over Schwinn, so it is reasonable to assume that they will leave GT distribution in place (particularly for the next 12 months while they consolidate their holdings). We expect this sale of GT will have little or no effect in Canada from the perspective of the dealer and consumer.
Tour of Catalonia, Spain
Stage 5, Girona - Girona, 15.4 kms:
1. BOARDMAN, Christopher GBR GAN 21:38
2. OLANO, Abraham ESP BANESTO at 0:17
3. VELO, Marco ITA MERCATONE-UNO-BIANCH 0:25
4. DOMINGUEZ, Juan Carlos ESP VITALICIO SEGUROS 0:30
5. MAURI, Melchor ESP ONCE-DEUTSCHE BANK 0:39
1. BOARDMAN, Christopher GBR GAN 15:55:29
2. OLANO, Abraham ESP BANESTO at 0:27
3. VELO, Marco ITA MERCATONE-UNO-BIANCHI 0:30
4. DOMINGUEZ, Juan Carlos ESP VITALICIO SEGUROS 0:43
5. MAURI, Melchor ESP ONCE-DEUTSCHE BANK 0:54
Track World Cup #4 - Hyeres, France
1.Felicia Ballanger (Fra) 34.603
2.Jiang Cuihua (Cna) 36.022
3.Iryna Yanovych (Ukr) 36.234
4.Oksana Grichina (Rus) 36.235
5.Lori Ann Muenzer (Can) 36.461
We know Lori Ann Muenzer was also competing in the Sprint, but not yet have a result for her. We also have an unconfirmed report that at Berlin (World Cup #3) she finished 8th in the 500M and 13th in the Sprint.
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