It doesn’t matter how good your strategy is if you can’t meet your ongoing operating expenses. But at least a viable strategy means you can attract an investor, even in tough businesses like snowboarding and winter resorts. The bad news is that the investor, knowing you absolutely, positively have to make a deal, is going to be a tough negotiator.
American Skiing Company (ASC) got $150 million from Oak Hill (less a 3 percent fee) for preferred stock convertible into 48.5 percent of the company’s common stock. Ride, a snowboard manufacturer, sold 100 percent of its equity to K2 for approximately $14.3 million in K2 common stock.
The Ride Deal
Because K2 bought Ride, the company, rather than just its assets, K2 gets all the assets and assume all the liabilities at the transaction date. Ride’s latest public balance sheet (dated March 31, 1999) showed assets of $32 million and liabilities of $16 million. The liabilities, as usual, are completely real. Some of the assets, such as the $8.5 million in goodwill and $5.4 million in plant and equipment may not be worth what they are carried at. If I were K2, I’d value the goodwill at around zero. The value of the plant and equipment would depend on what use Ride’s snowboard factory will eventually have.
Just for fun, let’s say that the real asset values are equal to the all too real liabilities. In that case, you could say that K2 paid $14.3 million for the order book and brand name. My guess is that the assets are worth something more than the liabilities. Overall, I’d judge that K2 got a good deal.
The ASC Deal
ASC sold 150,000 shares for $1,000 a share. They are convertible into ASC common stock at an initial conversion price of $5.25 and they pay quarterly dividends of 8.5 percent annually. $80 million of the proceeds will be used to repay “certain senior indebtedness.” $30 million will be used to make an equity contribution to American Skiing Company Resort Properties, Inc. Another $30 million will be used to pay down some loans under ASC’s credit agreement. That amount can then be reborrowed for certain capital expenditures and asset purchases.
The deal should go a long way towards cleaning up ASC’s capital structure, satisfy some nervous lenders and reduce its overall annual interest cost.
Oak Hill representatives will have strong representation on the board of directors and its committees. The board will be composed of 11 individuals and Oak Hill will select four; Les Otten, ASC’s president and chairman, will select four. The remaining three will be independent directors recommended by the nominating committee and approved by the board. Each committee of the board will have two representatives appointed by Oak Hill and two appointed by Les Otten. Oak Hill will have one representative on each board committee and one seat on the board of directors of each of ASC’s major subsidiaries.
Questions
ASC remains the same company with the same management in place, but now has the capital to pursue its growth and development strategies. The key issue would seem to be how the leadership dynamic changes with Les Otten no longer in total control.
K2’s acquisition of Ride is a little more complex organizationally and strategically. K2 now has not only the K2 and Morrow snowboard brands, but the three Ride brands—Ride, 5150 and Liquid. How will they be positioned against each other is a major issue. It’s interesting to note that when Bob Hall came to Ride as CEO, one of his first actions was to reduce the number of brands Ride had. He felt there were too many conflicts and complexities in managing multiple brands. Now K2 has that issue big time.
What will happen to the Ride factory in California? Will the Device brand of step-in snowboard bindings survive? Who’s going to run which brands? K2 has now bought Morrow and Ride. Is this opportunistic buying, or part of a bigger strategy?
K2 will obviously hope to realize some synergies from the combination of the two companies. At the same time, marketing its five brands requires that it retain some distinctness in sales and marketing. To some extent these two goals conflict. I wonder which impulse will predominate.
The ASC deal closed in the middle of August and the Ride/K2 deal is expected to close around the end of October. Let’s hope these two company leaders can get back to running their businesses in short order.
