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Brunswick Purchases Hatteras Yachts24 Oct 2001 |
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Brunswick Purchases Hatteras Yachts24 Oct 2001 |
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Tuesday Oct 24, 2001 Brunswick announced an agreement to purchase Hatteras Yachts from Genmar for approximately $80 million in cash, plus another $20 million if Hatteras meets certain performance requirements over the next 20 months. Brunswick will receive future tax benefits with a present value of $13 million. We posted a copy of the press release.
Irwin Jacobs listed "minimum synergies" between Genmar and Hatteras as a reason for selling the unit.
George Buckley said it would be a way to allow Brunswick to meet the needs of their customers who want to move up in size and luxury, especially in the U.S. Hatteras management was previously negotiating to purchase the unit.
Separately, Genmar Holdings signed a 5 year agreement to purchase Mercury MerCruiser sterndrive engines, trolling motors, rigging and accessories from Brunswick. Purchases will begin in mid-2002.
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http://www.hatterasyachts.com |
The motor yachts are predominately 65 feet and up. |
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Brunswick's Boat Group president, Dustan McCoy, and others said they are not going to make them into Sea Rays, etc. They do not plan to change basic designs. He went on to say they believed the brand could be number 1 in the world in sportfishing and motoryachts over 65 feet. (note: some media reported the statement as 60 feet and some as 65)
Brunswick said current management would remain in place and they would still be built a the same location (New Bern, North Carolina). Brunswick's involvement will be in coordinating and regulating the supply chain and material sourcing for cost control.
Buckley said the unit is a logical extension from Sea Ray, he intends to grow Hatteras, especially overseas. He went on to state, "there also is virtually no overlap in the product line between Hatteras and our Sea Ray, Bayliner and Maxum pleasure boat lines."
Mr Wizard Comments: |
First off, Hatteras makes great products. It would be wonderful if some of
their attention to detail sifted down to the volume builders. Brunswick and Genmar are the two largest U.S. boat builders. Mr. Jacobs says he's selling the unit because it has "minimum synergies" with his product line and Mr. Buckley says he's buying it because it has "virtually no overlap in the product line". Come again?
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The "Separate Agreement"Right now times are very hard for the recreational boat industry. Brunswick announced the closing of a Sea Ray plant in Phoenix on the same day they announced this deal. Why would Brunswick give $80 million in cold cash to its major competitor at any time, let alone when times are hard?
Hatteras only makes about 70 units a year. In the past Brunswick bought captive boat companies to sell drives. Hatteras 50 footers use twin 800 to 900 HP diesels and the hundred footers use twin 1800 HP diesels. Absolutely no overlap with Mercury's engine line. Maybe the "separate agreement" for Genmar Holdings to purchase Brunswick drives was not so separate after all?.
What does the 50 - 100 foot business look like?
It has been extremely solid and growing rapidly in recent years. It even
continued to grow when the small boats went sour. But few orders
have been booked since Sept 11.
A large part of the cost of building smaller vessels is tied up in engines and drives. The percentage rapidly decreases as vessels become longer and more costs are associated with accessories, furnishings and workmanship. Another factor is the Longshore and Harbor Workers Compensation Act requiring employers to purchase special costly insurance on workers working on vessels over 65 feet in navigable waters.
Hatteras builds a about 70 units a year spread out over 15 models. That averages out to about 5 units per model. The distribution is probably strongly weighted toward the smaller vessels. Not quite the area of Brunswick's expertise.
This is a whole new ball game for Brunswick. They said they want to rope Hatteras into their combined purchase plans. But guess what, not lots of similar vendors (except fiberglass resin) and not lots of quantity discounts at 5 to 70 units a year.
Marketing
Mr. Buckley is talking about growing the Hatteras market through
existing Brunswick channels. Not sure if he's noticed, but the
channels are different. Have you seen many 80 footers in a dealer lot
recently?
Traditional boaters sure don't buy the big ones. They come with a crew quarters. These are sold to charters, zillionaires and corporations, not to people who want to go out and get behind the wheel.
The markets are different.Thats why the world has "Yacht Brokers" and "Boat Dealers" and they don't run together! Yes, a very few Sea Ray users may move up to the smaller end of the line. But, there a number of yacht and sport yacht builders out there and some of them were already moving up to Hatteras. But not much of anybody has been moving up, with total sales of only 70 units a year. I don't need my crystal ball to see it will be hard to move a greater percentage of them straight across without a stronger tie-in between the product lines. Brunswick just said they were not going to do that.
Its going to cost a lot of money to keep a few demo units laying around (or trying to move them around). Brunswick will be flying people in to view them, not selling them to dealership walk-ins.
Thought it was interesting to hear Brunswick's Boat Group president say they believed the brand could be number 1 in the world in sportfishing and motoryachts OVER 65 feet. That specifically excluded the lower end of Hatteras's line (where it overlaps Sea Ray) and what are probably Hatteras's highest volume models. Sounds like they made a specific attempt not to alienate Sea Ray in the press.
Follow the Money
With a sale price of $80 million and another possible $20 million for
a total of $100 million and annual sales of $130 million thats a purchase
price of 100/130 or 77 percent of annual sales. Companies are valued
many ways many factors go into establishing the market value of a firm.
The value of their assets, present value of their annual profit revenue
stream, goodwill, intellectual property, executives and workforce that
may remain with the firm, and anticipated future trends and events are
a few. Ongoing manufacturing firms often trade at near their annual sales.
For example, In June, Brunswick gave $68 million for Sealine International
(UK) with annual sales near $70 million. But that was before Sept. 11.
What message did Brunswick send its 370 employees in the Phoenix Sea Ray plant when they announced its closing on the same day they spent $80 million in cash for Hatteras. My crystal ball sees a few upset ex-Sea Ray employees trying to cast a spell on Mr. Buckley.
Perhaps part of the $80 million purchase price is a bonus for signing the drive contract? It could be in effect, a rebate conditional on Brunswick purchasing Hatteras. This means the market value of the Hatteras transaction may be less than the $80 to $100 million. Brunswick might be able to trying write-off the rebate as a goodwill deduction on their tax return, the $13 million the press release says is a Brunswick tax advantage as the result of the transaction?.
Jumping in too late?
Dozens of companies and jumped into or moved up into the big yacht
business in recent years because it was booming. Brunswick has a history
of jumping into an industry too late (fitness equipment, PWCs, bicycles)
Bet their stockholders hope its not too late this time. I do too.
Another Brunswick lawsuit?
Mr. Buckley and Mr. Jacobs made a lot of buddy, buddy comments after the
sale. You would expect that of Mr. Jacobs as he wants Brunswick to think
they got a good deal, but the extent of the interchanges might signal some
sort of future co-operation. Could there be a new FTC lawsuit on the
horizon for collusion, dividing territories or markets and price fixing?
Hopefully they were truly contemplating working together for a better boating
future.
Closing Thoughts
The industry's pull to maintain consolidation was stronger than the ability
of Hatteras management to take the company private. Will we see
the consolidation of other yacht and megayacht builders or was this
just a deal to sell Genmar Holdings drives? If so, we may see
Brunswick sell them off in a few years?
On the positive side, its good to see Genmar and Brunswick actively managing their portfolios and thinking about the future. The industry was stagnant for several years, now things are happening much faster and the big players are beginning to notice. I wish them the best, along with the Hatteras employees and the Sea Ray employees laid off in Phoenix.
Hopefully some of the recent moves in the industry will contribute to its stability. Meanwhile, if anybody wants to drop off a new Hatteras hundred footer for a test ride, Mrs. Wizard is always saying how she wants to go for a cruise.
Mr. Wizard
FEEDBACKPlease e-mail your comments about this article to Mr.Wizard.
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