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Compass Diversified Holdings Message Board

  • marty.chilberg marty.chilberg Aug 25, 2011 9:19 AM Flag

    interesting acquisition PR

    Nice to see an accretive deal but a couple of curious components to announcement...

    First is the deal was financed by mostly debt with an addl 1.5m shs priced at $12.50 placement with largest shareholder. That's a big of positive news in my opinion as they likely had full disclosure before agreeing to deal and they agreed to a price without much of a discount to current market price.

    Also the PR quoted CEO Alan Offenberg. Didn't say acting CEO so it appears that he has been given the position. Has anyone seen an SEC filing about Joe Massoud? I think they have a time limit to disclose key exec departures or new hires. Seem to recall it being pretty short like 2 days.

    Bottom line though is the $.15 cents of additive CF per share that this deal brings on a FY basis. Should result in solid opportunity for dividend increases going forward.

    Be interesting to see how it opens today


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    • follow up...

      Contacted the company and there has been no change of status. Massoud is still on a LOA and Offenberg is filing the role of CEO in his absense

    • I am very familiar with the firm CODI aquired. While I have, and will maintain, a position in CODI, I think the price they paid, roughly 2X sales, was too rich. More importantly, Camelback (CB) has some real threats in the years ahead. Ine of which is a function and result of a trend in action sports (particularly cycling) consolidation in channels and products.

      In cycling we're seeing firms like Trek, Specialized, and Giant in a sense "take over" bike stores (LBS channels) reducing an LBS's typical 7-10 bike brands, to one (either Trek, Specialized, Giant). Likewise, these large, integrated cycling firms all produce clothing, helmets, and packs/bags... very high margin products. In many cases, the large firms dictate what competitive products/brands their retailers can, and can not, carry.

      As an action sports firm ourselves, we feel that while Camelback makes good products, in segments including cycling and skiing, we think there are other firms, some who have been in the "pack" business far longer than CB, that have better products... at the very least some of theses firms can and will challenging CB in the market place likely eroding both CB's dominance and overal pricing/margins.

      The pricing that CB enjoys in mil-spec sales may be short lived. The sales to US infantry units, for example, represent, in my opinion, prices and margins that are far above true market prices. Either cut backs in military spending in general, or more competitive bidding processes, could adversely affect CB's top line and really play havoc on their bottom line.

      While I do see growth in the various markets CB serves, I see far nore competition than growth and an array of threats adversely affecting profit margins. Conversely, while CB has a well known and respected brand distribution, I do not see any particular deep or durable competitive moats.

      • 1 Reply to digrealhard
      • thanks for the insight dig. Interesting but your thoughts now have me questioning this somewhat. the bigger issue is whether they can see sustainable growth in FCF for CB. If you are right, this is the bigger issue. However, after looking at your price perspective I took a little closer look at the deal and would have to agree. While the deal was positioned as accretive by $0.15-$0.20 per share on a FY basis, that is solely because they purchased this for debt rather than issuing stock. My back of the envelope calc is as follows:

        Pre deal 6/30
        Equity $454m
        LTD $86m
        FD wtd shs o/s 46.7
        FCF 6mths $37.3m
        Annualized FCF $74.6
        AnnFCF/shs $1.60
        So in summary they were generating free cash flow of $1.60 per fully diluted share pre acquisition.

        Ent Value $245m
        Equity issued 1.575shs at $12.50
        Debt issuance $225m
        Statement that CB will generate an additional 15-20 cents per share post acq.

        Roughly means that after interest the now o/s 48.28m shs will generate 1.75-1.80 per sh in FCF. Used $1.80 for a total of $86.8m pf annualized FCF.

        However the leverage increased substantially from a debt/eq ration of around .19 to around .69

        Also worth noting that if they had issued stock for the entire purchase price the numbers would adj as follows:
        -FD shs o/s grows to 66.3m
        - Annual FCF grows to around $98.3m assuming an effective int rate of 5% on the debt.
        - FCF per share would drop to $1.48 from the $1.60 we are currently at.

        So in summary from a pricing perspective this is an accretive deal solely because they leveraged rather than issuing shares for the PP. Sort of like getting higher EPS by a debt driven stock buyback.

        The bigger issue though is the ability to grow the franchise. IF this is a growth bus, then it could still make a lot of sense. If it's flat to down looking out, a terrible deal.


    • I have not seen any SEC filing re Joe Massoud. I'm guessing the PR was just poorly drafted. (The CODI website still has Joe Massoud's as the CEO, another error.)(

      Considering the experience that Camelbak has with military contracts, I'm thinking a little bit about the benefit of shared experience factor with Fox Racing Shox and hoping that this might speed up the successful expansion of Fox into military contracts. Just another dream ...

      I'm also wondering a little bit about the financing, too. My guess is that mgmt decided now was not a good time to do a secondary and raise cash, so use financing, have the secondary later when the market is better, and then pay off the debt. (Especially when the interest on the debt service is substantially less than the effective yield on the distribution ... Seems like a no-brainer.)

    • The market reaction seems to be neutral, which implies that there's no obvious downside to this deal.

      A lot of my hiker friends use camelbak products. It's a good brand and product.

      Overall, I think this deal is definite positive for CODI, and once the market gets more positive, there should be some upside for the stock price.

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