2023-11-29 07:48:24 ET
Summary
- Vista Outdoor shares have risen 14.7% recently, with a proposal by Colt CZ Group to acquire the company accounting for a nice portion of that upside.
- Colt CZ Group's proposal values Vista Outdoor at $30 per share, a 16.4% premium over the previous day's closing price.
- The proposed deal would result in a combined company with firearms and ammunition accounting for the majority of revenue.
- Though details are messy at this time and nothing is guaranteed, this does seem to be a favorable deal for both parties.
The last few days have been very interesting for shareholders of Vista Outdoor (VSTO). Those who follow my work closely might recall that I wrote a bullish article about the company in the middle of October. That article was in response to shares plunging almost 24% after management announced that they would be selling off the very profitable Sporting Products portion of the enterprise and using that cash to pay down debt and fuel growth for the operations that would remain. In response to that plunge, I wrote that if I were a shareholder of the company, I would be 'very angry' since the transaction looked to be suboptimal. But even so, shares had fallen far enough that the company warranted a 'buy' rating.
Since then, things have gone quite well. Shares are up 14.7% at a time when the S&P 500 is up 4.4%. Some of this move higher is certainly in response to the market recognizing that there was an overreaction to the downside. But there's no denying that a sizable portion of the increase can also be chalked up to the fact that, on November 22nd, gun manufacturer Colt CZ Group SE (CZGZF) issued an unsolicited proposal to acquire Vista Outdoor in a cash and stock deal valuing the company at $30 per share. To be clear, I do believe that there are some issues with the data provided by Colt in its brief investor presentation. But all things considered, I can understand why the market responded positively to this development.
An interesting, but complicated deal
On November 22nd, the management team at Colt CZ Group sent a letter to the Board of Directors of Vista Outdoor. In that letter, the company announced that it believed the market's negative reaction to Vista Outdoor announcing its decision to sell its Sporting Products business indicated that there might be better opportunities for shareholders elsewhere. Namely, the company put itself forward as a potential purchaser of Vista Outdoor at a price of $30 per share. At that price, it would translate to a 16.4% premium over where shares traded the day before the announcement was made.
As part of the transaction, management had planned to raise an additional $900 million. $600 million of this would be in the form of additional stock, with another $300 million in the form of debt. All things considered, at the close of the deal, shareholders of Vista Outdoor would receive a 55% ownership of the combined enterprise, plus an undisclosed amount of cash. Management did not lay the math out for shareholders. But they did say that the projected market capitalization of the company, given proposed prices, would be $2.3 billion. That would be $1.265 billion worth of equity that Vista Outdoor's shareholders would be entitled to. When you figure out that the implied price on the company is $1.75 billion, you end up with approximately $484 million.
After the close of the transaction, the company would have $900 million to buy back stock with. The combined company would still generate most of its revenue from the US market. But the overall sales composition of the company in terms of products will be significantly different. Firearms and ammunition, combined, will account for the vast majority of revenue this is because essentially all of the $657 million of revenue generated by Colt CZ Group last year came from those products.
As I wrote about in my prior article regarding Vista Outdoor, the company has faced some mixed financial performance over the past few years. By comparison, Colt CZ Group has been doing quite well for itself. On a constant currency basis, using the current exchange rate, the company has seen its revenue grow from $307.1 million in 2020 to $657 million in 2022. Profits have approximately tripled from $30.5 million to $91.6 million. And as the chart above illustrates, operating cash flow, adjusted operating cash flow, and EBITDA have all increased nicely during this window of time as well. In the chart below, you can see that financial performance for the first nine months of 2023 has been a bit mixed, with revenue and profits up, but cash flow figures down. Then again, you can't expect a perfect uptrend in perpetuity.
In the table below, you can see some of my own calculations regarding net debt and leverage for the combined company. This is where the data seems to fall apart. You see, according to the management team at Colt CZ Group, the EBITDA generated by Vista Outdoor in its last completed fiscal year was about $622 million. That is technically correct. But we are already near the tail end of the third quarter of the following fiscal year and financial performance has deteriorated rather drastically. Based on management's own estimates, EBITDA for this year will be approximately $440.5 million at the midpoint. By comparison, Colt CZ Group should see its EBITDA drop from $144 million to $141.8 million. It would be wise two years these most recent estimates given how far we are into the fiscal year. And that does change the picture to some extent.
All combined, the company should have EBITDA for the current fiscal year of around $582.3 million. And based on my own estimates, operating cash flow should be somewhere around $368.7 million. This assumes that we add in the $300 million of additional debt the combined company will have on its books at an assumed interest rate of 6% per annum. It also factors in a 21% effective tax rate. Using these numbers versus the standalone figures, you can see that shareholders of Vista Outdoor will have a company that is slightly less expensive compared to what they have now as a standalone business when it comes to the EV to EBITDA approach, but slightly more expensive on a price to operating cash flow basis. To some, it may seem peculiar as to why such an outcome would be desirable enough to push shares higher, but at the end of the day I would argue that the EV to EBITDA approach is the more important of the two.
There are other factors that can come into play. For instance, there exists the potential for synergies. However, we have not received any estimate as to what those might ultimately be. There's also no guarantee that any such deal between Colt CZ Group and Vista Outdoor will materialize. This is because, on November 22nd, the management team at Vista Outdoor issued a press release in which they acknowledged receipt of the unsolicited proposal. They stated in their response that they have not made any determination regarding the proposal and that the current agreement to sell the Sporting Products division is still in place. They did agree to review the proposal. But this is expected considering that the Board of Directors of Vista Outdoor has a fiduciary responsibility to do what's in the best interests, as they see, of shareholders.
Takeaway
Fundamentally speaking, this proposed transaction between Vista Outdoor and Colt CZ Group does look to be a superior deal than the current arrangement that Vista Outdoor has embarked on. This does not mean that management will accept the proposal. I have seen other instances in which the management teams have disagreed about the best course of action. In the meantime, I still remain bullish on the stock because either result should bring additional upside for shareholders. But if there is positive movement on this particular front, it could prove a boon for shareholders.
For further details see:
Colt CZ Group Is Targeting Vista Outdoor