Why outdoor products M&A will rise
Over the last five years, consumer enthusiasm for outdoor activities has increased dramatically, resulting in an outdoor products market that reached $887 billion in 2017, according to Outdoor Industry Association. Shifting lifestyle preferences which favor recreational activities along with elevated consumer awareness of the physical and mental benefits of athletic activity have driven category growth.
According to the Bureau of Labor Statics, strong macroeconomic trends (i.e., a consumer confidence level of 128.0 and a record low unemployment rate of 4.0%) have supported conditions for a robust outdoor products market. The U.S. economy remains positioned for strong growth of 2.8% in 2018 and 2.4% in 2019, according to The Balance, “US Economic Outlook for 2018 and Beyond.” A strong labor market, low inflation and rising incomes provide consumers with greater discretionary income, significantly contributing to a demand for outdoor products.
A prosperous economic climate and growing desire among consumers to follow active and healthy lifestyles may lead to strong mergers and acquisitions (M&A) activity and premium transaction multiples in the outdoor products space.
The outdoor products M&A market has been dominated by hyper-acquisitive strategic buyers motivated to expand category offerings, fill product gaps and bolster e-commerce capabilities. There has also been a resurgence of financial sponsors seeking add-on acquisitions for platform companies and smaller, high-growth brands within the fragmented market.
Capstone Headwaters reported 89 deals were announced in 2017 in the segment, while there were 88 in 2016 and 67 in 2015. Large strategic buyers have an abundance of cash, in conjunction with attractive financing options, and are under increased pressure to generate topline growth, both organically and through acquisitions. This has resulted in premium acquisition multiples for smaller high-growth and high-margin targets. Strategic buyers remain the largest source of deal activity in the industry, responsible for more than 60% of outdoor products deals in 2017. Financial sponsors accounted for approximately 40% of outdoor products transactions — nearly a 10% increase from 2016 — and remain intensely focused on deploying additional capital into the sector, according to Capstone Headwaters.
In addition, public valuations of outdoor products companies continue to increase, with a current median EBITDA multiple of 14.9x, significantly higher than the 7.2x median multiple 10 years ago and the 10.5x median multiple in 2013, according to S&P Global Market Intelligence.
The winter sports segment has shown significant transaction activity. According to SnowSports Industries America, between 2011 and 2016, the segment grew by a compound annual growth rate of 5.5% to $4.7 billion. The growing popularity of winter sports, coupled with increased recreational spending, has propelled demand for snow sports equipment and apparel. According to S&P Global Intelligence, within the past year, Textron Specialized Vehicles purchased Arctic Cat for $247 million and Kohlberg & Company acquired Newell Brands’ winter sports businesses for $240 million, resulting in implied EV multiples of 12.4x and 9.6x, respectively. Performance Sports Group, formerly known as Bauer Hockey, suffered a bankruptcy in 2016, but Birch Hill’s acquisition of Reebok-CCM Hockey for $110 million in 2017 shows optimism from financial buyers for the future of this segment. Despite lower-than-expected snowfalls in recent years, consumers continue to spend on winter sports products, and large strategic buyers will likely continue to make acquisitions in the space.
Footwear products have been another strong performer within the category, seeing some of the highest valuations in the outdoor products segment. Trail running shoes and light, travel-friendly shoe offerings have been successful in targeting the millennial demographic. These companies are forward thinking, focusing on environmental consciousness, leveraging customer data and incorporating more flexibility into their supply chains. The recent change in strategy has driven transaction values in the industry. Kathmandu Holdings recently acquired Oboz Footwear for $75 million, representing an implied EV multiple of approximately 16x, according to S&P Global Intelligence. It is expected that the valuations for footwear companies in this space will remain high and be an attractive opportunity for sellers going forward.
Other categories in the outdoor products industry have also experienced growth, attracting the attention of potential acquirers:
· Hydration, a $320 million category, has grown 37% over the past two years, and strategic buyers have expressed heightened interest, represented by the recent acquisitions of CamelBak, Nathan, Fuelbelt and Hydroflask, according to The NPD Group Inc.
· Indoor climbing grew 13% in 2016 and now represents a $175 million market, according to the NPD Group Inc.
· Athleisure is expected to become a $230 billion market by 2024, driven by companies like Gap’s Athleta, Lululemon Athletica and Sweaty Betty growing 20%, 17% and 16% in sales, respectively, according to Business Insider and Fashion United.
· Hiking and climbing have increased their participation rates over the past three years by 7% and 6%, respectively, according to the Outdoor Foundation, American Recreation Coalition.
· Manufacturers had over 500,000 recreational vehicle shipments in 2017, up 17.2% from 2016, a record year in volume, according to the RV Industry Association.
In addition to the growth within certain categories, several large strategics in the segment have divested assets to rebalance their portfolios and focus capital allocation on higher-growth subsegments within the outdoor products space. Major strategic companies have already sold assets in the past year and will likely continue making significant divestitures going forward. For instance, Newell Brands recently divested the Rawlings brand and is in the process of divesting several other other businesses including its Pure Fishing Division, in a major transformation plan, for a combined value of roughly $10 billion, according to SGB Media.
VF Corporation recently sold Nautica to Authentic Brands to focus on redesigning its portfolio, empowering key brands and enriching its direct-to-consumer platform. Additionally, Vista Outdoor just sold its eyewear brands Bollé, Serengeti and Cébé for $158 million, and now plans to sell its Bell, Blackburn, Giro, Stevens and Savage brands, according to a recent company announcement. The current divestiture trend from major strategic companies will provide significant M&A opportunities within the segment over the next few years.
Given strong strategic buyer balance sheets, pressure by shareholders for companies to grow earnings and large strategic divestitures, large outdoor products companies will likely keep driving outdoor products M&A activity. Additionally, private equity firms may continue to demonstrate interest in this space and make a significant impact on the category. All of this, coupled with consumers increasingly leading healthy and active lifestyles, will continue to fuel the industry.