In a bold move that solidifies K2's position as a leader in the winter sports and ski market, the company has entered into an agreement to purchase Marmot Mountain Ltd., Volkl Sports Holding AG, and The Marker Group. The three acquisitions are expected to close by mid-July pending regulatory approval.
Marmot joins recently purchased Ex Officio in K2's newly formed apparel division. The outdoor apparel, tent, pack and sleeping bag manufacturer was purchased for $84 million in a combination of K2 stock and cash, plus the assumption of seasonal working capital debt.
Volkl, a high-end German alpine ski company based just outside of Munich, is owned by a group of Swiss investors and owns 50 percent of Marker. The other 50 percent of Marker is owned by Italian ski boot manufacturer Tecnica SpA. K2 purchased Volkl and Marker for $124 million plus assumed debt.
Following a 2002 merger with Marker here in the United States, Marmot owns the exclusive worldwide licensing rights to Marker-branded apparel, and had been paying around $1 million in annual fees, according to Richard Heckman, chairman and CEO of K2.
Heckman, who was practically giddy while talking about the three deals during a conference call early Wednesday, June 16, noted that because of the unique and intertwined business relationships already in place with all three companies, the resulting brand synergies and fit for K2 were a natural.
"With the addition of Volkl, we will go from selling 250,000 skis to 750,000 pair of skis worldwide," Heckman said. "Volkl has powerful distribution in Europe, so this opens a door to our brands there. Volkl partnered with Marker, and now owns 43 percent of the binding systems market in the U.S. With Marker, we now own the leading binding manufacturer in the world, and we have an entry into the Czech Republic with Marker's facility there.
"By adding Marmot to our apparel division, we now own a $100 million apparel business that is strong 12 months of the year -- Ex Officio in the spring and summer, and Marmot in the fall and winter. We will also be able to earn better prices on sourcing through Asia now with a 12-month buy package," he said.
Wayne Merck, K2 Inc.'s president and COO, told SNEWSÂ® later that the company took a bit of a gamble when it purchased Ex Officio because the company has wanted Marmot for some time and purchased Ex Officio with the plan that it would package "Ex O" and Marmot together in the same division.
"With the two companies, the synergy is amazing with tons of opportunity to grow the brands and distribution through plans like shop-in-shops, which are already being discussed, and more. Frankly, a goal of doubling sales for us would be an underachievement," said Merck.
K2's SEC 8-K filing indicates the company is heading out on a road show to make a private offering of $150 million in senior notes due in 2014 with the proceeds going to finance the acquisitions of Marmot, Marker and Volkl. The filing did not indicate the interest rate.
All that is left for K2 is figuring out how to integrate the newly acquired brands into its existing corporate division structure. Currently, Ex Officio and Marmot (the apparel division) report to Merck. In addition, Volkl and Marker will also report to Merck.
When we expressed a bit of surprise that Volkl and Marker were not reporting to Robert Marcovitch, president of K2 Sports, which is the division that operates K2's ski, snowboard and snowshoe brands, as well as Dana Design, Marcovitch explained, "We just need to be sure we don't trip over one another while we figure all of this out.
"Ultimately, what will end up happening is that each brand and each division will capitalize on the respective brands' technical and sourcing expertiseâ€¦that is where the real opportunity is," Marcovitch told SNEWSÂ®.
Although everyone has a different idea of what will happen, what is clear is that the divvying up of responsibility and divisional structure remains a work in progress. Marmot manufactures tents, sleeping bags and backpacks, but it makes no sense to split Marmot up, so those remain within the apparel division. Dana Design remains part of the K2 Sports division, for now.
Merck added, "We will sit down with the key folks to decide what makes the most sense for the brands, including Marmot. The bottom line is, we need the right people focusing on the right products and brands."
SNEWSÂ® View: Toss out the concept of market consolidation -- that's more methodical. What K2 is conducting is akin to an industry blitzkrieg, as we watch the company roll through the market grabbing one leading brand after another to make them its own. And, rest assured, K2's appetite is far from satiated.
Despite the fact that no one during the conference call could pronounce Marmot (look, people, how hard can it be!), we do have one word to say: WOW! Congratulations to Steve Crisafulli and the entire Marmot staff of 45 company owners (employees owned 50 percent of Marmot at the time of the sale) who just received a payout that garners wrap-around grins. Not bad for a company that was purchased in 1993 by a few employees, friends and a few outside investors. Sales volume back then was just under $6 million. At the time of the sale to K2, Marmot's numbers were projected at $77 million with company offices in Santa Rosa, Calif.; Salt Lake City, Utah; Canada; Sweden; Germany; Hong Kong; and the United Kingdom. The $84 million purchase price was a nifty 1.2 times last 12 month sales, pretty near the $88 million we estimated when we knew Marmot was being shopped back in April. But, shhhh, we'll let you in on a little secret. After talking to folks who had seen the JP Morgan report on Marmot, by factoring in the seasonal debt, the real number of the Marmot acquisition is more like $100 million, give or take a million or so. K2 isn't too worried about the number -- though we're sure they'll cringe when reading it in print. For the record, K2 picked up a brand that is very profitable, fiscally very healthy, and currently growing at a rate of just over 20 percent a year by our estimates. It is also a brand they can leverage to develop strong apparel brands within its existing brands, such as K2 skis, Ride, Stearns, etc.
Crisafulli told SNEWSÂ® that K2 is the perfect partner, and one he singled out when JP Morgan first approached him. We do know that VF was seriously shopping for Marmot, but there was no way, we'd imagine, that Crisafulli would let Marmot go to a buyer that would simply subjugate the brand under the umbrella of another -- in this case TNF.
With Volkl, K2 vaults immediately from being a leading, albeit primarily domestic, ski manufacturer to having a strong global presence.
Under Heckman, K2 has shown a remarkable aptitude for purchasing successful and leading brands -- Heckman once told us that he was not interested in sick brands that needed acquisition to survive. He keeps their management structure in place and steps out of the way to allow the brands to do their thing. Too bad he was not in charge when K2 first acquired Dana, because it is likely that Dana would have grown, rather than struggled.
With the acquisitions and strengthening of the company in the winter sports market, Heckman has largely completed his goal -- stated during a conference call last year -- of better balancing the company in terms of brand strength in all seasons as well as company strength through each quarterly report.
Despite a question from a clueless wonder asking Heckman during the morning conference call if he were going to move Volkl production to China out of "the small German town" (Heckman was incredulous anyone could call Munich a small town), all brands will remain operating out of their current headquarters. Volkl, Marmot and Marker will retain their full management teams, as has become customary under Heckman's leadership.
Looking back at our notes on the K2 acquisition of Ex O, we see that what Ex O needs most right now are computers and staffing to manage data and customer service since those functions had been moved to Orvis. Our guess is Ex O won't be buying new computer systems and, instead, K2 will move to have Ex O's back room operations run by Marmot. As for synergies between Ex O and Marmot on the design, production and sourcing side, they are almost too numerous to list.
Next on the docket for K2 is a footwear company we'd guess. And we wonder just how long it will be until K2 decides it needs a paddlesport company, too.