Canadian snowmobile, watercraft and all-terrain vehicle manufacturer BRP Inc., better known as Ski-Doo, raised $254 million from its IPO May 22. Sold by Bombardier (OTC:BDRBF) in 2003 to a consortium led by the founders along with Bain Capital, BRP was able to sell 12.2 million shares at C$21.50 per share. Scheduled to start trading sometime after the deal closes May 29 under the symbol "DOO," BRP's original investors look to have done very well on their 10-year investment.
The question is whether new investors will do nearly as well. Read on and I'll look into if you should buy its stock once it becomes available.
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The Bain/Bombardier/Beaudoin consortium paid C$998 million for the recreational products business. When the deal closed on December 18. 2003, the Canadian dollar was trading around 75 cents meaning the actual price in U.S. dollars was closer to $749 million. BRP's revenue in fiscal 2003 was C$2.5 billion with an operating profit of C$35.4 million. The investors paid 7.3 times EBITDA. Based on its most recent financials (January 2013 fiscal year end), BRP's IPO investors paid around 9.2 times EBITDA.
Bain, who hold 47% of the votes after the IPO, along with the other consortium members, invested C$310 million cash back in 2003. Five years later it was planning BRP's IPO when the financial crisis hit and the coming out party was put on hold for what turned out to be an additional five years. Ten years is an extremely long holding period for a private equity firm. Perhaps that's why BRP paid out C$529 million in dividends (C$46 million was actually return of capital) in the last two weeks of April. With those payments, the investment consortium is in the black by C$219 million with its remaining 83.5% equity interest worth another C$2.09 billion. Assuming its shares remain above $21.50 for the 180 day lock-up, they'll be looking at a compound annual growth rate of 23.8% over the 10-year investment, which is far superior to the S&P 500.
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What Do You Get
Despite the obvious delay on its payday, the consortium eventually got one. Will you? Consider that four of BRP's peers: Arctic Cat (Nasdaq:ACAT), Polaris Industries (NYSE:PII), Brunswick (NYSE:BC) and Harley Davidson (NYSE:HOG) combined have an average enterprise value of 10.1 times EBITDA, just slightly higher than BRP's 9.2 times. However, Arctic Cat and Polaris, its most similar peers in terms of products sold, have multiples of 7.1 and 10.7 times EBITDA respectively. So, Arctic Cat's currently considerably cheaper to buy than BRP, yet its operating margin is 140 basis points (BPs) higher at 9.0%. Polaris, although possessing a slightly higher valuation than BRP, has an operating margin of 14.7%, almost double its Canadian competitor. More importantly, Arctic Cat has net cash of $96.6 million, Polaris' net cash position is $274.4 million and BRP has C$549 million in net debt. You can buy Arctic Cat for less even though it's in a better position financially. Sure it might be considerably smaller in terms of revenue than BRP but it's a much better business.
Sophie Cousineau of the Globe and Mail wrote a good article April 19 about BRP's weaknesses. She points out that although it's betting its future on all-terrain vehicles--which sell year round--the company trails Polaris, Honda, Yamaha in terms of market share. In the hot side-by-side market, BRP is second next to Polaris who dominate this growing market. While it might feel good being second in this market, companies like Arctic Cat, have only been in the game for a little more than a year now. With strong brand recognition they're a thorn in the side of both Polaris and BRP. Frankly, getting away from its strength in snowmobiles and personal watercraft seems like a bad idea given the amount of debt it has. Shareholders better hope it doesn't kill the golden goose in an attempt to sell products year round.
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With several competitors worthy of your investment including Arctic Cat, Polaris, Honda and others, it makes little sense to overpay for BRP. If it drops to $15 then I might be interested. However, at $21.50, the debt just plain scares me away.
Bain and company have done well owning BRP. The chances of you repeating this act is remote at best. Just let this one pass. Eighteen months from now you'll be glad you did.
At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.