K2 acquires Ex Officio from Orvis

K2 Inc. (NYSE:KTO) has acquired Seattle-based travel and technical outdoor apparel manufacturer Ex Officio for an undisclosed sum. It was an all-cash deal with K2 reporting that the transaction would be neutral per share in 2004, but accretive in 2005. Ex Officio is now the sole company in K2's newly-formed apparel division.

K2 Inc. has acquired Seattle-based travel and technical outdoor apparel manufacturer Ex Officio for an undisclosed sum. It was an all-cash deal with K2 reporting the transaction would be neutral per share in 2004, but accretive in 2005. Ex Officio is now the sole company in K2's newly-formed apparel division.

"It is going to change things around here," Rick Hemmerling, president of Ex Officio, told SNEWS® shortly after the sale was made official. "The fact that we were the first apparel company they (K2) have chosen to build their apparel division around, and that the company has a history of only going after industry leaders, makes us feel very, very good."

Wayne Merck, president and COO of K2 (NYSE: KTO), added, "Acquiring Ex Officio is the perfect entrée into building an apparel division for K2. Their technical designs that are lifestyle specific fit ideally within our existing hardgoods and softgoods platform. Clearly, we love the management team and we love the brand."

Merck told us that he expects Ex Officio to double its sales volume in three years at the very least.

"We absolutely will not force growth, but believe that there are clear opportunities for expansion while remaining committed to the integrity of the brand," said Merck. "If it is possible, we even want to work to improve the perception of the brand's integrity."

International expansion is a natural area for K2 to begin opening doors for Ex Officio. At present, Ex Officio is sold to approximately 600 retailers in North America, but the company's European and Asian presence doesn't even register a blip on any sales screen.

Ex Officio was founded in 1987 by Rick Hemmerling and Joe Boldan. Boldan left the company a few years ago, shortly after the Orvis acquisition in August 2000, and is now (as scary as it seems to those of us who know him) a university professor.

While Hemmerling is practically giddy over the acquisition and what it means for his company, he is quick to point out that Orvis was a wonderful company to work with.

"They were a great cultural fit with us and as far as the fly-fishing heritage, a natural marriage," said Hemmerling. "However, they are a retail platform and we are not, so it became quite evident to both of us that Orvis could not support the growth initiatives we needed on an adequate level.

"The shift to K2 ownership means we are, in many ways, an independent company again and will be able to run our business on a more independent platform. With Orvis, we were integrated into their system with AP and AR and payroll and credit all running through their offices," said Hemmerling. "Now we will be bringing people back into our company to run those functions, which is great because that will give us an entrepreneurial ability to be aggressive again when we need to be and, for the most part, be completely in control of our own destiny."

Hemmerling reports directly to Merck, who made no secret of the fact that as the division expands, Ex O management will be considered for division management positions if needed.

SNEWS® View: We've been watching this sale develop since we first learned Ex Officio was for sale in mid-January of this year. It was entertaining to watch the parade of executives from companies such as K2, VF and more trying to casually stroll into Ex Officio's booth during Winter Market and have extended conversations and meetings with Hemmerling, and then casually leave again as if nothing was up. We also heard that K2 became the sole player negotiating with Orvis as of about 30 days ago. Yes, SNEWS® can keep a secret or two. This is a strong acquisition for K2 and yet another clear statement from that company it is in the game for the long haul and doesn't intend to be simply an also-ran. Ex Officio has not reported sales figures since its acquisition by Orvis, and neither Ex O or K2 reported the acquisition number. However, a bit of sleuthing and piecing together news reports of percentage increases in sales coupled with numbers reported to us and others prior to the Orvis acquisition places Ex O sales for 2003 somewhere in the $18 million range (keep in mind this is a definite shot in the dark). If true, and if K2 stayed true to form by not paying a huge multiple (and since the deal was cash and did not involve stocks as folks thought it might early on in the deal, a standard multiple of 1.1 times last 12 month sales is most likely) that tells us the sale price was somewhere in the neighborhood of $19 million, plus or minus a few hundred thousand. For K2, it has secured a leading company that will serve as a cornerstone as it seeks to build an apparel division. For Ex O, it now has a financial partner with resources that will allow the company to grow as it should, and allow Hemmerling and team the ability to begin developing ideas for new products it's had to keep on the back burner until now. As for K2's future, we'd expect to see footwear become part of the company's portfolio sooner rather than later. Oh, and there's the matter of adding a leading fall and winter apparel company to the mix, to complement the spring/summer business Ex Officio now brings. Ahh, this is going to be fun to watch.


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