| Captain
Name: Steve Mras Vessel: Blackman 20, Salsipuedes Location: Fullerton Job:Banker | Re: penn sold out to shakespear
I've met Dick Heckman and talked to him about roll up opportunities (I'm a banker) in the fishing industry. I noted that the flyfishing industry was particularly ripe as there are over 80 different manufacturers of fly reels, a classic cottage industry. He was well aware of that and rattled off all the names they had looked at, but he noted that they were really looking for plays where the tackle was conducive to distribution through large box retailers (i.e. WalMarts) and sporting good chains (as this was their strength) and where manufacturing could be offshored in China to realize savings. K2 owns several manufacturing facilities in China and Heckman said that with ownership and control of the facilities in China, there wasn't anything he couldn't manufacture with quality on par with manufacturing in the U.S. or Japan.
Folks, that is the brutal reality of the current work. U.S. = design and intellectual property; China = labor & manufacturing. My best advice to any of the youngsters here is go to college and get your education to be part of the former and not the latter.
Ski, Fish And Pitch
Monte Burke, 03.28.05
Richard Heckman rolled up the water industry in the 1990s. Can he do the same thing for sporting goods?
Skimaker K2 was in need of a little imagination when Richard Heckmann became chief executive in October 2002. Customers seemed to like the skis--K2 was selling 125,000 pairs a year in the U.S.--but prospects for growth were meager. "How many people ski without poles?" asked Heckmann, now 61. Answer: virtually no one. "But K2 didn't make them. I couldn't believe it."
So he turned to K2's fishing-gear unit, which produced 8 million rods a year at its Chinese plant. "Fishing rods are just upside-down ski poles," he reasoned. Last year K2 sold 70,000 pairs of poles, packaging them with its skis, double what they peddled in 2003. They may only add a few million bucks to the top line, but making rods and poles in the same plant helps K2 cut manufacturing costs. "We can go to the retailers, give them better margins on poles and package them with skis and our outerwear," says Heckmann. "That's one more SKU that we get at the expense of our competitors. It's a classic example of how consolidation can work."
Heckmann knows from consolidation. He spent the 1990s turning US Filter into the world's largest water company by acquiring hundreds of smaller outfits. Now he's making a similar run at sporting goods. Since taking over K2, Heckmann has spent $550 million acquiring 17 companies--as diverse as Brass Eagle (paintball equipment), Rawlings (baseball gloves) and Volkl (a German skimaker that he hopes will give him an entry into the European market)--and folding them into what he hopes is a greater whole. What's the idea? Heckmann is an avid skier, fisherman and paintball player, but the plan is all business: He wants to keep piling high the shelves at the Sports Authority, Modell's, even Wal-Mart, all four seasons of the year.
That's the goal, though Heckmann has a mixed record as a master builder. He was, by turns, part of an air rescue squad during the Vietnam War, founder of what became the nation's largest custom-prosthetic-device company, a ski bum, a bureaucrat in the Carter Administration and a stockbroker for Prudential-Bache Securities. It was there in 1989 that he realized how many industries depended on clean water--and how few large suppliers there were. A year later, with an initial investment of $1.6 million, he started US Filter, providing water filtration and purification to companies as varied as Coca-Cola and Intel. Along the way he picked up 260 companies, larding revenues from $17 million in 1991 to $5.5 billion in 1999.
Though profits soared initially, the buying binge caught up with him. Heckmann bought most companies with US Filter's high-price stock, diluting earnings per share and masking the fact that most bottom-line growth was coming from acquisitions. By 1998 there were no earnings at all--US Filter lost $300 million, after acquisition costs, on $3.2 billion in sales--and after the purchase of Culligan International, no more big companies to buy; by October the stock had plunged 65%. By April 1999 Heckmann himself had become takeover bait: Vivendi bought out the company for $8.2 billion, including assumed debt. Underscoring the greater-fool theory, Jean-Marie Messier paid a market premium of 15%, and Heckmann pocketed $100 million, $66 million of that in cash.
Bored at Vivendi Environmental, Heckmann quit in 2002. By then he had become nonexecutive chairman at K2. While the Carlsbad, California company was a mess, he saw "a classic consolidation play." The signal: Retailers were in the midst of their own roll-up--Modell's, the Sports Authority and Dick's Sporting Goods were all in the process of doubling--or growing even larger. "The retailers want fewer vendors," says Heckmann. "They want to ensure delivery and cut costs."
Although he had no stake in K2, Heckmann muscled in, urging management to buy Rawlings, a great but struggling brand. Then-chief executive Richard Rodstein wavered. "I finally went to the board and said, ‘Him or me,'" Heckmann recalls. Within weeks Rodstein was forced to resign. Since the $98 million Rawlings acquisition K2 has become a shopaholic in Heckmann's image, pushing into leisure games as well as apparel. It now has 35 different brands; sales of winter goods make up only 25% of revenues.
Retailers seem to like this new incarnation. Sales to big customers like the Sports Authority were up 23% last year over 2003. Mitchell Modell, chief executive of Modell's, won't get specific but says his orders from K2 are "through the roof." To ensure that they continue that way, Heckmann has placed one of his people at Modell's to manage displays and inventory, a novel idea in the sporting goods industry. Added benefit: Heckmann says he gets 80% of his acquisition ideas from retailers. In 2002 an executive from Gart Sports called to tell him about Worth, a softball equipment maker. "He said they had great products but were small and had trouble delivering," Heckmann says. K2 bought Worth in September 2003 for $37 million.
Rapid consolidation is reflected in K2's numbers. Revenue rose 67% to $1.2 billion in 2004; net income jumped nearly threefold to $39 million. But internal growth is less impressive--up 8% for the top line. Also, Heckmann has floated a lot of stock in order to get bigger.
What about Heckmann's timing? Participation in sports is trending downward in the U.S., reports the Sporting Goods Manufacturing Association. Fewer Americans are playing baseball or softball; interest in downhill skiing and fishing has fallen, too. Paintball and snowboarding are among the few growing activities. Industrywide, wholesale revenues of sporting goods inched up 4% last year to an estimated $52 billion.
K2's stock is languishing at a recent $14.16. Even fans like William Chappell, an analyst at SunTrust Robinson Humphrey, worries that Heckmann is overpaying for growth. He says Marmot, the outdoor equipment and apparel company K2 paid $84 million for last year, was purchased for 11 times operating income (earnings before interest, taxes, depreciation and amortization), twice the multiple he likes to see. Some fear that Heckmann will make an expensive play for Rossignol, the ski, tennis and golf company that is shopping itself. (Heckmann proclaims he has no interest.)
But build he apparently must. Heckmann wants to expand his holdings in apparel and outdoor footwear, on the way to becoming what he envisions as a $5 billion company: "Eventually I want the U.S. attorney general to have to break up our monopoly." |
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