Polaris is acquiring 4 Wheel Parts parent Transamerican Auto Parts, Image source: Transamerican Auto Parts.

Polaris Industries (NYSE:PII) might be enduring stubborn headwinds in its core markets, but the motorcycle and off-road vehicle specialist just announced a big acquisition to both deepen its product portfolio and extend its reach. And with shares climbing as much as 5% early Wednesday on the news, it's apparent investors are happy with the move.

A big bet on accessories

More specifically, Polaris revealed it has agreed to acquire privately held Transamerican Auto Parts (TAP) for an aggregate consideration of $665 million. Adjusting for around $115 million in net present value of future tax benefits, that equates to a reasonable nine times TAP's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the trailing 12 months ended September 30, 2016. TAP generated roughly $740 million in revenue over that period, and achieved 15% and 17% compound annual sales and EBITDA growth, respectively, from 2012 through 2015.

And TAP boasts a vertically integrated business -- that is, it combines multiple stages of production typically handled by several companies -- as the country's largest manufacturer, distributor, retailer, and installer of off-road Jeep and truck accessories. That's a $10 billion plus market that Polaris describes as growing, but "highly fragmented."

It's easy to see, then, why TAP piqued Polaris's interest: By combining forces, the smaller company will extend Polaris's presence in aftermarket accessories and attract new clients to the brand. But it also already sports a portfolio of four-wheel-drive aftermarket products that -- as Polaris puts it -- are "highly complementary" to Polaris's own off-road vehicle business.

As such, Polaris can look forward to incorporating TAP's off-road product development expertise into its own portfolio of products. As it stands, Polaris saw sales of its existing parts, garments, and accessories business climb 5% year over year in its most recent quarter, handily outpacing the more modest 0.6% growth in overall company sales, to $1.131 billion, during the period.

"We see tremendous opportunity for further growth as we become an integral part of the Polaris organization," elaborated TAP CEO Greg Adler. "Combining TAP with Polaris' aftermarket brand portfolio facilitates significant synergies, while Polaris's financial resources provide the backing we need to pursue a variety of growth prospects we have identified across the organization."

Powering forward

The deal is still subject to regulatory approval and satisfaction of customary closing conditions. And keeping in mind that Polaris ended last quarter with cash and equivalents of just under $147 million on its balance sheet, it expects to fund the acquisition through its existing revolver and term loan.  But assuming all goes as planned, Polaris anticipates it will close by the end of the year. After that, TAP will continue to function as a distinct business -- so should offer minimal integration risk -- and its results will be included under a newly formed "Aftermarket" business segment.

Polaris also sees the purchase being accretive to earnings per share -- excluding purchase accounting and acquisition costs -- in 2017. And over the longer term, it should be able to generate annual cost synergies of around $20 million within three years -- and not in the "headcount consolidation" sense you might think, but driven primarily by a combination of expanded product offerings, as well as procurement and distribution efficiencies. 

All things considered, between those cost synergies, a more diversified product portfolio, and symbiotic growth opportunities for both TAM and Polaris, there's little not to like about this deal from an investor's standpoint. And once the dust settles, I won't be the least bit surprised if Polaris's stock climbs higher from here.

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