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Dorel Focuses On IBDs With Cannondale

Published February 29, 2008

BY JASON NORMAN

MONTREAL, Quebec—When Dorel Industries purchased Cannondale early last month the industry’s top tier became a little more crowded and competitive.

Dorel had no problem throwing down the gauntlet either.

“We hope to be the No. 3 player in North America with this transaction,” said Martin Schwartz, president and chief executive officer. “Our goal is to be No. 1 in the IBD channel.”

With Cannondale and Sugoi joining GT Bicycles in the independent channel, it seems Schwartz has room to talk. Dorel is backing up its commitment to the IBD by splitting the company’s recreational/leisure segment into two distinct operating divisions.

One of these divisions—the Cannondale Sports Group—will focus strictly on the IBD channel with those threepowerful brands. Former Pacific Cycle president and chief executive officer Jeff Frehner will serve in that same capacity for this newly formed IBD division.

Alice Tillett, who had been executive vice president, mass and sporting goods channel at Pacific Cycle, has been named president of the company, taking over for Frehner. Pacific Cycle will become a stand-alone division, focusing exclusively on mass merchant customers with brands that include Mongoose and Schwinn.

“We have learned a great deal about the bicycle industry,” Schwartz said since taking over Wisconsin-based Pacific Cycle in 2004.

One lesson was not to offer up an iconic brand such as GT into the sporting goods channel. In 2005, Pacific returned GT to the specialty channel. Schwartz called the IBD a higher-margin channel than the mass market.

Frehner called the creation of this IBD division a “smart business move,” alleviating some dealer apprehension that Cannondale could possibly end up at Dick’s Sporting Goods.

Retailers can breathe another sigh of relief that Frehner has no intention of bringing Cannondale into Performance Bike stores as it did with GT.

“There’s no truth to that at all,” Frehner said. “It didn’t make sense then (when Cannondale offered bikes at the bicycle chain), and it doesn’t make sense now.”

Mary Jane Mark, owner of Mack Cycle and Fitness in Miami, was pleased by this specific news, and the deal itself.

“I think it’s a good thing for Cannondale,” Mark said. “When you have a company looking to sell [Pegasus] it probably means they’re not looking that far ahead. Their focus is different.” Mack Cycle is one of the biggest Cannondale dealers on the East Coast.

“Pacific has a tradition of running a bike business,” Mark added. “They’re going to want a return on their investment.”

Cannondale Gets New Lease On Life. Canadian consumer goods company Dorel paid a price that many industry insiders felt Pegasus would never get for Cannondale and Sugoi. The all-cash deal worth $190 million to $200 million (U.S) is subject to Cannodale’s earnings results for the year ending June 30.

Last November when rumors swirled of the pending deal, the Canadian dollar was roughly 7 cents weaker against the U.S. dollar. In early February, exchange rates were nearly at parity, eliminating any exchange advantage.

One industry insider who has followed the Dorel deal since the beginning, called it a “long and drawn out” negotiation—due in large part to Dorel’s initial offer more than six months ago being less than stellar. But Dorel came back to the table in a big way. He predicted Cannondale would sell for a little more than $100 million.

Pegasus Partners, Cannondale’s owner since March 2003, turned a substantial profit on its investment. It purchased Cannondale from the auction block for approximately $58 million.

Looking to strengthen its bike portfolio, Pegasus purchased Canadian apparel company Sugoi from founders David Hollands and Carol Pratner in July 2005 for roughly $12.4 million (U.S).

2007 sales for Cannondale and Sugoi were approximately $200 million.

Another industry veteran said the high price tag for Cannondale “speaks well to the industry that you can grow a business” and receive a sizeable return on investment.

BMO Capital Markets, which covers Dorel’s earnings, had a mixed reaction to the deal. In a brief, it praised the acquisition for reducing Dorel’s dependency on mass merchants such as Wal-Mart, and offering some synergies.

However, it suggested the price was high given the unattractive trends of the bicycle industry, such as slowly declining sales and tough competition in the specialty channel—with Trek and Specialized holding the top slots.

Jay Townley of the Gluskin-Townley Group said the concern about Dorel’s purchase is typical of the concern expressed about bicycle company acquisitions over the last 10 years.

“To me the concern about U.S. bicycle market trends, including its highly competitive nature, is the more immediate and more important of the concerns expressed,” Townley said.

The Sourcing Question. Frehner said he saw no need to make any immediate changes within Cannondale, whether it be staffing, sourcing or relocating its Connecticut headquarters or Pennsylvania manufacturing facility. Matt Mannelly will stay on as Cannondale president and chief executive officer.

Cannondale will reap immediate dividends of Dorel’s sourcing experience and contacts when it comes to freight and insurance costs, Schwartz said.

The larger question lies with the sourcing of product. Cannondale hasalways distinguished itself by manufacturing its bikes in the United States. Last year, Cannondale turned to Asia for the first time to source entry-level aluminum bikes.

Frehner wouldn’t comment on this subject beyond saying that “everything will be analyzed.”

Townley said it’s too early to tell what strategy Frehner might pursue, but added that Pacific brings existing relationships with foreign suppliers.

Townley called Dorel’s buying leverage “limited” in the global bicycle industry, since it doesn’t have established relationships with suppliers or purchasing power.

“What purchasing leverage there is for Cannondale from the acquisition will come from and through Pacific,” Townley added.
How this affects, if at all, Cannondale’s 225,000- square-foot manufacturing facility in Bedford, Pennsylvania, remains to be seen. The facility continues to make high-quality, high-priced bicycles, having added 7,000 square feet solely for carbon fiber production over the past two years.

Townley believes there’s no reason American bicycle manufacturing plants can’t be competitive with those producing similar product throughout the world.

“Bedford has just as much potential to be financially viable and competitive as any other bicycle plant producing similar products anywhere in the world,” Townley added.

Dorel In It To Win. Since Dorel is touting Cannondale as the “crown jewel” of this newly formed IBD division, it’s unclear how it will reposition GT. Frehner said what Cannondale means to the retailer and what GT means to the retailer are two different things.

“I hope over time we can provide dealers a more one-stop shop,” Frehner said, referring to multiple specialty brand offerings.

Cannondale and Sugoi seem to be in good hands with Dorel seemingly in it for the long haul, rather than a mere quick flip for profit. Pegasus is an investment company not an operating company, and it was widely believed that it would sell Cannondale for a quick profit.

“Dorel’s vast resources and experience provide us with long-term stability and the ability to accelerate our goals for growth with our retailers,” Cannondale’s Mannelly said.

Stan Mavis, president of Sugoi, also lauded Dorel, which returns the company to Canadian ownership, for bringing stability. “Every account that Dorel has ever acquired they still hold,” Mavis said. “We know they’re going to invest in us. Dorel got two great brands and tons of value.”

Cannondale retailers are also appreciative of what appears will be a long-term investment. Helen’s Cycles with multiple locations throughout greater Los Angeles is the largest and one of the longest-running Cannondale retailers on the West Coast.

“When Pegasus bought Cannondale it was well known it wasn’t a long-term deal,” said Brad Edwards, director of retail development for Helen’s. “We’re definitely happy about this new stability.”

Edwards is also happy to hear that Cannondale won’t undergo any radical staffing changes. “We have established really good relationships there,” Edwards said. “These relationships don’t just happen overnight.”

Topics associated with this article: Mergers/Acquisitions

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