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Winnebago Boosts RV Portfolio With $344M Newmar Buyout

Zacks Equity Research

In a bid to boost its portfolio, Winnebago Industries, Inc. WGO recently inked a deal to acquire Indiana-based recreational vehicle (RV) manufacturer, Newmar Corporation, for $344 million.

Deal Details

Total consideration of the deal is valued at $344 million, which will be funded by a combination of cash and stock, based on Winnebago’s $36.77 closing price on Sep 13. Winnebago will finance the deal with $270 million in cash and 2 million shares of its stock issued to Newmar shareholders. Per the pact, any stock price shortfall — as of the closing date — will be compensated by incremental cash payment up to $20 million.

Subject to satisfactory closing conditions and regulatory approvals, the agreement is set for closure in first-quarter fiscal 2020. Upon completion of the deal, Newmar shareholders will hold approximately 6% of Winnebago’s outstanding shares. Newmar will operate as a standalone unit within Winnebago.

Deal Motive

Winnebago, which is a leading producer of RVs in the United States, primarily builds quality motorhomes, travel trailers, fifth wheel products and boats. Newmar, which manufactures luxury motorhomes, seems to be a natural fit in Winnebago’s portfolio of outdoor lifestyle brands. The complementary asset base has been the key driver of the deal.The Newmar buyout adds high-end motorized products to the existing Winnebago brand lineup. The deal will enable the companies to pool their expertise in the region and share their best practices, and bolster the combined entity’s scale and leadership position.

Deal Benefits

This buyout is likely to bolster Winnebago’s product line and dealer network, and rev up the motor-home segment. The deal will expand Winnebago’s core RV platform, thereby enhancing its position in North American RV landscape.

The combined entity will have approximately $2.6 billion in pro-forma revenuesand lead to a reduction in debt. The deal is likely to be immediately accretive to its free cash flow and fiscal 2020 EPS. Additionally, the strategic acquisition is expected to lead to significant commercial, financial and operational synergies due to the integration of asset, systems and staff. The deal is also expected to result in cost savings of at least $5 million annually for a period of three years.

Winnebago Gaining From Strategic Buyouts

On a year-to-date basis, Winnebago has rallied 55.6%, outperforming the industry’s growth of 37.8%. The company also surpassed earnings estimates in each of the trailing four quarters. Winnebago has been riding on the strength of its acquisitions, including the buyout of Grand Design and Chris-Craft in 2016 and 2018, respectively. The Grand Design acquisition expanded the existing towable RV product offerings of Winnebago, while the Chris-Craft takeover enabled the company to enter into the marine segment.  These acquisitions bolstered the firm’s footprint and diversified portfolio in the outdoor lifestyle market. The Newmar acquisition is also likely to boost the performance of Winnebago.

Will Growth Continue Amid Recession Worries?

The recreational vehicle industry is influenced by many strong macroeconomic factors and is extremely sensitive to overall strength of the economy, as buying an RV is a large discretionary purchase for majority of customers. With the weakening of the economy, RV sales generally fall sharply, as consumers do not feel confident enough in their financial stability to justify a large recreational purchase.

The industry has started to show signs of a slowdown, which is considered as an early warning sign of a recession. According to the RV Industry Association, RV unit shipments have declined around 20% so far this year, after declining 4.1% in 2018. Amid such a scenario, RV manufacturing biggie Thor Industries THO is scaling down the production of RVs. Further, LCI Industries LCII has consolidated some of its facilities in view of the slowdown. Headwinds like rising input costs and sluggish demand may impact the near-term performance of Winnebago, which carries a Zacks Rank #4 (Sell).

Notably, wholesale shipments of RVs in 2019 are forecast to be 401,200 units, indicating a 17.1% year-over-year decline. Shipments for 2020 are likely to decline 3.5% to about 387,400 units. The industry is at risk from the U.S.-China trade war, with RV components likely to get impacted by tariffs, which would significantly raise prices for manufacturers. The price increase would likely be passed on to consumers, in turn lowering demand.

Despite the cyclical downturn, the industry surely holds promise, as millennials are more inclined to spend on experiences that recreational vehicles can deliver. If the economy stays strong and continues to grow, RV sales will likely get a boost, thereby enhancing the performance of stocks within the industry.

Meanwhile, a better-ranked stock in the RV space is Indiana-headquartered Skyline Champion Corporation SKY, which sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The firm builds a variety of manufactured and modular homes, park-model RVs, along with modular buildings. It was formed by the merger of Skyline Corporation and Champion Enterprises Holdings, LLC in June 2018. Skyline Champion, which had generated $1.3 billion revenues last year, is one of the largest homebuilders in America of late.

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Winnebago Industries, Inc. (WGO) : Free Stock Analysis Report
 
Skyline Corporation (SKY) : Free Stock Analysis Report
 
Thor Industries, Inc. (THO) : Free Stock Analysis Report
 
LCI Industries (LCII) : Free Stock Analysis Report
 
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