After sliding in the months leading up to 2016, it hasn't been a bounce-back year for Polaris Industries (PII 1.93%).
Polaris and its investors dealt with disruptions in its painting plant about a year ago, and more recently investors had to digest a significant guidance reduction because of additional RZR thermal-related issues that required a much more extensive and expensive repair solution than originally predicted.
But today is a new day, and Polaris' stock traded higher on Wednesday after news the company would acquire Transamerican Auto Parts (TAP). Let's dig into the details and better understand this acquisition.
Transamerican who?
The company being acquired is a privately held and vertically integrated manufacturer, retailer, and installer of off-road Jeep and truck accessories.
Image source: Polaris Industries' TAP acquisition presentation.
Polaris agreed to acquire the company in a deal worth about $665 million, and after adjusting for an estimated $115 million in future tax benefits, the purchase price is about nine times Transamerican's EBITDA for the trailing 12 months (TTM) ending Sept. 30, 2016.
In terms of what TAP will add to Polaris on the top line, Polaris' TTM revenue through the second quarter checked in at about $4.6 billion, and TAP's TTM revenue, albeit through Sept. 30, was roughly $740 million. TAP's three-year (2012-2015) compound annual growth rate of sales and EBITDA checked in at 15% and 17%, respectively. Management also expects the acquisition to be accretive to earnings per share in 2017, excluding purchase accounting and acquisition costs.
Looking at the business aspect of the acquisition, TAP offers a foot in the door of a growing 4WD off-road market that will pair nicely with Polaris' ORV business. The acquisition could also open the doors to incorporate some of TAP's off-road product development knowledge, processes, and expertise into the development of new Polaris products. The combined company could offer growth in the form of cross-selling products -- be it TAP products at Polaris dealerships or Polaris products through TAP's channels. TAP boasts seven leading aftermarket brands, 75 retail stores in 24 states, and six distribution centers.
What's the catch?
While the acquisition appears to be a good one for Polaris, investors might remember that the company has a little less than $150 million in cash on its balance sheet at the end of the second quarter. That makes sense, as management noted that the acquisition was funded through an existing credit revolver and an existing term loan. That puts Polaris' leverage at about two times EBITDA and a debt-to-total-capital of about 55%. That shouldn't be enough for investors to be concerned about a dividend cut or slowdown in share repurchases, but expect an increase in interest expense after the deal is closed.
On the bright side, in my opinion, this is still a positive development for Polaris investors, who have seen few of those over the past year.
