2023-10-16 17:48:32 ET
Summary
- Vista Outdoor Inc. has sold its sporting products business in a $1.91 billion deal, causing uncertainty and caution among investors.
- The remaining business of Vista Outdoor issued a significant profit warning, raising concerns about its future performance.
- The deal has resulted in the company no longer operating with a net debt position and instead having a net cash position of around $750 million.
In July, I believed that Vista Outdoor Inc. ( VSTO ) was muddling along. The company had seen a huge boost on the back of the pandemic, which saved the business from financial difficulties, as booming earnings were used to grow the outdoors business.
Following these trends, the company decided to split the business, into both an outdoor business and ammunition business, on top of a rather compelling earnings power and reasonable debt load. While the situation looked quite fair, I was hoping to get a better entry point, mostly related to reasons of poor capital allocation in the past.
With the business now selling its crown jewel in a massive $1.9 billion deal, investors reacted with great caution as there were many uncertainties post the transaction. Moreover, the business announced a massive profit warning for its remaining business as well. This left me and investors with many question marks after quite a few disappointments in the past.
A Recap
Following a string of M&A deals in the later 2010s, Vista Outdoor found itself in a tough situation pre-pandemic. For the year 2019, sales of Vista fell by 11% to $2.0 billion, with EBITDA of $137 million translating into a leverage ratio of 5 times.
Amidst tough operating conditions and a highly leveraged balance sheet , shares of Vista Outdoors traded at single digits at the time, with all options being on the table. The pandemic provided a lifeline, with sales rising to $2.2 billion in 2021, on which huge profits of $272 million (equal to $4.50 per share) were reported.
Amidst leverage rapidly coming down, the company made some new acquisitions, including a $474 million deal to acquire Foresight Sports in 2021, after which the company posted sales around $3 billion and earnings of around $7 per share. With earnings power trending at $8 in 2022, shares rose to the $50 mark, with investors extrapolating strong operating conditions.
This momentum and (over)confidence meant that management decided to acquire Fox Racing in a $540 million deal in the summer of 2022, at a premium multiple, as perhaps some buybacks would be better-advised given the prevailing valuation. The company, furthermore, acquired Simms Fishing Products in a $192 million deal.
For 2023, Vista originally guided for some margin declines. Seeing sales up to $3.2 billion, earnings were seen down to $7.00-$7.75 per share, with peak margins seen reversing, as the company furthermore announced its intention to split up the business.
Range Bound
Since the summer of 2022, when shares traded in the high-twenties, shares have traded in a $24-$30 range until July of this year. In March 2023, the company announced fiscal 2023 sales at $3.08 billion with adjusted earnings per share down 23% to $6.40 per share. Net debt came down to $963 million, all while EBITDA was reported at $622 million, translating into a leverage ratio of around 1.5 times.
For the fiscal year 2024, the company guided for sales of around $2.9 billion with earnings seen around $4.50-$5.00 per share, despite some of the 2022 deals making a full year contribution. The company furthermore announced that it was making progress to spin off the business into a $1.5 billion Sporting Product business which was set to post EBITDA margins in the mid-twenties. The $1.4 billion Outdoor Product business was expected to post margins in the low teens.
With Vista having spent some $1.2 billion on three deals post-pandemic, all part of the Outdoor Product business, it is clear that the company overpaid. This comes as all of Vista Outdoor commanded a $2.5 billion enterprise valuation in the summer, as the Outdoor Products business is the smallest segment of the business (certainly in terms of earnings power).
Still trading at just 5-6 times earnings, valuations looked compelling, but I was simply too cautious given the past episodes of capital allocation.
A Big Sale
In fact, shares of Vista Outdoor have risen from the high-twenties in the summer to the $33 mark in recent weeks, as shares fell more than $6 per share to $26 at the moment of writing.
The big news came in October, as Vista Outdoor reached an agreement to sell its sporting products business to Czechoslovak Group a.s. in a $1.91 billion deal. Following this deal, the plan to separate the business is off the table, with the company fetching a 5 times EBITDA multiple based on the 2024 expectations for the Sporting Goods business. CSG will actually emerge with Vista Outdoor as part of this transition, with current investors in Vista being given shares in Outdoor Products (also known as Revelyst) and a $750 million cash component, with no debt due.
If I understand the deal and its structure correctly, that implies that the successor of Vistra will no longer operate with a net debt position, while it will operate with a net cash position of around $750 million. With 58 million shares outstanding, pro forma net cash is equal to about $13 per share. With shares down to $26, down $7 per share at the moment of writing, the unleveraged business traded around $1.5 billion, which includes $750 million in net cash.
In other words, the outdoor products business is valued at just $750 million here. This was applied to a business originally expected to generate $1.4 billion in sales in the fiscal year 2024, with EBITDA margins seen at the midpoint of 12.5%, as the company actually maintained this guidance when it posted its first quarter results in July. Outdoor products are now seen at $1.30 billion, as updated alongside the deal announcement, with EBITDA seen around 8%.
This means that an original segment EBITDA guidance of $175 million is now seen at just $102 million, being a detrimental impact. This means that the transaction news cannot be seen in isolation, as the remaining business of Vista Outdoor essentially issued a huge profit warning for the year.
And Now?
Quite frankly, the dismal share price reaction to the divestment looks like an overreaction, and the resulting valuation for the business looks low. That said, the Czechoslovak Group deal looks rather questionable, with the most profitable business being sold on the cheap, while the remaining business just issued a huge profit warning.
While it is tempting to get involved in the mid-twenties, there are too many moving parts and past disappointments to get involved with Vista Outdoor Inc. here, despite the cheap optics and potential real cheapness seen here.
For further details see:
Vista Outdoor: A Big Deal To Sell Sporting Products Business Raises Questions