Columbia acquires Mountain Hardwear

Columbia Sportswear (Nasdaq: COLM) has entered into a merger agreement to acquire Mountain Hardwear Inc. for approximately $36 million, including $30 million in cash and $6 million of debt assumption.
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Columbia Sportswear (Nasdaq: COLM) has entered into a merger agreement to acquire Mountain Hardwear Inc. for approximately $36 million, including $30 million in cash and $6 million of debt assumption. The acquisition is subject to the approval of Mountain Hardwear shareholders and is expected to close March 31.

Mountain Hardwear will operate as a wholly owned subsidiary, remaining based in Richmond, Calif., and will remain an independent brand with a completely independent management structure.

The company's executive leadership, including Jack Gilbert, president; Paul Kramer, vice president of design and sourcing; and Mike Wallenfels, vice president of sales and marketing; will continue with Mountain Hardwear for at least three years, SNEWS has learned.

During the March 13 conference call for media and investors -- announced barely an hour before the 2 p.m. Pacific Time start -- Columbia CEO Tim Boyle stated that there would be no changes to the company's staff (Mountain Hardwear currently employs approximately 65 individuals) or the company's rep force.

Boyle made no bones about the fact that Columbia believes Mountain Hardwear can increase sales from the unaudited $31.4 million realized in 2002 (broken down to $24.4 million in apparel sales and $7 million in equipment), reaching as much as $100 million in just five years. Estimates for 2003 place Mountain Hardwear's sales goals at nearly $37 million.

To achieve the growth, Boyle told reporters and analysts that the company would look first to simply expand Mountain Hardwear's reach into the specialty retail sector. Columbia feels Mountain Hardwear has been extremely restricted from expanding its current distribution into existing specialty retail markets because of a constrained capital base and the conservative nature of the founders.

"Mountain Hardwear has been growing more rapidly than Columbia, and with our capital base strength and strength of relationships in the retail sector, we believe Mountain Hardwear can be a very significant specialty store brand -- and very quickly," Boyle told SNEWS in a personal interview after the conference call.

Columbia estimates that its brand is distributed to approximately 5,000 retailers in the U.S. with 20 percent of those buying the Titanium brand -- Columbia's premium brand. Columbia also estimates that the same retailers buying Titanium also buy Mountain Hardwear, leaving plenty of room for retail expansion.

Gilbert told SNEWS that Boyle had assured his team any decisions regarding distribution strategy would be left to Mountain Hardwear; Gilbert was emphatic that Mountain Hardwear would be distributed only through specialty markets and never through department stores.

Boyle also stated that growth would come from other areas beyond U.S. retail expansion, including expanding current product lines, adding new product categories, and broadening its international reach.

"Over time, we think there may be a footwear opportunity, and we believe that their accessories business can grow. We also believe that the company has an opportunity to add packs and perhaps other ancillary opportunities along those lines," Boyle told listeners on the conference call.

When asked about licensing opportunities, Boyle said anything was possible, but licensing explorations were not a priority.

SNEWS View: WOW! From the SNEWS team, a heart-felt congratulations to both Columbia and Tim and Gert Boyle for a savvy acquisition, and to Gilbert and company at Mountain Hardwear for well-deserved rewards and new-found growth leverage. We're certain that Paul Kramer is rubbing his hands together with glee at the possibilities of new materials and product design opportunities.

On a strictly business level, Columbia gets the high-end technical outdoor brand the company has craved -- and desperately needed -- to round out a solid portfolio, while Mountain Hardwear gets deep pocket support, brand marketing savvy, a company that is very skilled at taking costs out of a product line, and a company that has a sourcing and distribution system second to none. Hard to believe Mountain Hardwear was founded only nine years ago. Now the company is a leading player with significant clout.

This deal certainly didn't happen overnight. Columbia's been trying to close this deal for some time. At the end of last year, the first attempt died -- some thought for good. Round Two resurrected itself at Outdoor Retailer this year, and SNEWS has been following it closely since.

Though no one at Columbia or Mountain Hardwear can confirm specific details because of SEC regulations, SNEWS is going to take a few very educated stabs at what retailers and the industry can expect in the months and years to come (We'll see how correct we are.)

While Columbia has tremendous sourcing and distribution advantages, the integration with Mountain Hardwear will be gradual. Don't expect to see prices drop, because they won't. Mountain Hardwear will realize greater margins for itself over the next year through greater efficiencies, but those will simply go to the bottom line or be plowed back into increased marketing and R&D budgets.

New product line possibilities had the investors humming with questions during the conference call. And, as pointed out by Boyle, Columbia acknowledges that packs and footwear are possibilities. But when? Consider: Not so long ago, Mountain Hardwear looked at buying Osprey. Consider too that the cost of entry into packs is far less than, say, figuring out how to design and produce footwear in an already very crowded market -- not that the pack market is screaming for another player. Given that the company has recently retained the services of a pack designer, one Charlie Mosely, we would guess that by Spring 2004, you will see a pack line from Mountain Hardwear. We would also surmise that the company will be ultra conservative about moving forward with footwear, so don't expect to see any toes dabbled in the water there (sorry for the bad pun) before 2006.

Expansion of the clothing line, including the addition of -- gasp -- cotton sportswear, will happen much sooner, as that plays to Columbia's core competency. We would guess that you'll see lifestyle/sportswear apparel expansions early in 2004.

What can you expect from the overall market expansion strategy? Look to Europe for the big play there. Although this might surprise many Americans, Europe represents a much bigger market for high-end specialty retail outdoor product sales than the United States -- and that's from most of the leading outdoor brands that spoke to SNEWS for this story. Folks who know Mountain Hardwear and what it now sells into Europe say they feel that 15- to 18-percent growth there is not unreasonable. Canada is another closer arena that is also ripe for growth.

In Europe, Mountain Hardwear sells into Germany, the UK and Scandinavia on a royalty basis through distributors and licensees, which reduced the inventory and capital risk for the company. Gilbert told us that it is likely the royalty program will continue for a while because Mountain Hardwear has existing contracts in place. We would surmise, though, that Columbia and Mountain Hardwear will be looking to better utilize Columbia's French-based distribution center, which could mean higher margins, as well as looking to explore possible ownership of distributors in Europe as Hardwear's sales increase sufficiently to justify such a move.

What does this mean for existing retail accounts? Only good things. We would expect that Mountain Hardwear would be a better supplier as a result with more muscle to do in-store merchandising and to enhance customer support.

Oh, and don't for a minute think that this wasn't about The North Face to some degree. Once VF acquired TNF and that company began firing on all cylinders again, Columbia has been seeking an upper-tier brand that would allow it to compete and grow. TNF overwhelmingly sold through better than any other brand this year, according to most sources we talked to. Consider, too, that two-thirds of TNF's sales are now coming from products the company introduced in the last 18 months. We guarantee that Columbia has been watching, closely. Let the games begin!

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