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Shares of Alliant Techsystems (NYSE:ATK) fell 2.5% in Friday's trading session as investors were digesting the announcement of the acquisition of Bushnell Group a day earlier.

The deal is fair, yet the short term momentum might be under pressure after a strong share price performance over the past year. Coupled with the built up in leverage, investors might be taking some short term profits.

Yet the long term prospects for the business remain good as the company continues to diversify away from the defense industry.

The Deal

Alliant Techsystems announced that it has entered into a definitive agreement to acquire Bushnell Group Holdings.

Alliant will pay $985 million in cash for the company, although the final price tag is subject to closing adjustments.

Bushnell is a designer, marketer and distributor of branded sports optics, outdoor accessories and performance eyewear. Following the deal, ATK will boost offerings in security ammunition, sporting arms and accessories.

Bushnell has over 10,000 customer accounts in some 90 countries. Its portfolio of 19 outdoor brands include the Bushnell brand as well as Primos, Butler Creek and Serengeti, among others. The company employs some 1,100 workers across the globe. Key products include binoculars, riflescopes and night vision equipment for shooting, hunting and fishing.

Bushnell will be integrated within ATK's Sporting Group business. Back in June of this year, ATK already acquired Savage Sports Corporation to boost offerings in the hunting, competitive and recreational shooting offerings.

CEO Mark DeYoung commented on the rationale behind the deal, "The Bushnell acquisition is consistent with ATK's focus on establishing leadership positions in our core markets. This acquisition will broaden our existing capabilities in the commercial shooting sports and expand our portfolio of branded shooting sports products. In addition, this transaction will allow the company to effectively enter new sporting markets in golf, snow skiing and camping."

Bushnell sees sales of $600 million for the calendar year of 2013. The $985 million price tag values the business at 1.6 times annual revenues and 10 times EBITDA.

The deal will result in earnings per share dilution for the full fiscal year of 2014. Dilution will be the result of deal-related expenses. The transaction is expected to be accretive to earnings per share in the first full year of operations, being 2015. Full year earnings per share accretion in 2016 is seen around $1.00 per share.

The deal is subject to normal closing conditions, including regulatory approval. The deal is expected to close in either the third or fourth quarter of the fiscal year of 2014.

Valuation

Alliant Techsystems ended its first quarter $99.3 million in cash and equivalents. Total debt stood at $1.26 billion, for a net debt position of around $1.16 billion.

ATK has already arranged a $900 million senior financing commitment from Bank of America/Merrill Lynch (NYSE:BAC) to finance the deal. The remainder will be financed with the existing revolving credit facility and current cash balances.

Annual revenues for the fiscal 2013 came in at $4.36 billion, down over 6% on the year before. Net earnings rose by 3.5% to $272 million.

Trading around $96 per share, the market values ATK at $3.07 billion. This values the equity of the business at 0.7 times annual revenues and 11-12 times annual earnings.

Alliant Techsystems currently pays a quarterly dividend of $0.26 per share, for an annual dividend yield of 1.1%.

Some Historical Perspective

Over the past decade, shareholders in Alliant have seen three long term trends. Shares rose from $50 in 2003 to highs around $120 in 2007. Shares fell back towards $45 in the summer of 2012, after which shares have more than doubled to highs of $104 in August of this year.

After a recent correction, shares have fallen back to current levels at $96 per share.

Between the fiscal year of 2010 and 2013, Alliant Techsystems saw its annual revenues fall by some 10% to $4.36 billion over the past year. Net income fell by 3% to $272 million, while modest share repurchases offsets the fall in earnings.

Investment Thesis

The price tag for Bushnell seems fair. The $985 million price tag values the business at 1.6 times annual revenues and 10 times EBITDA. This compares Alliant's Techsystems own enterprise valuation of $4.4 billion, valued at 1.0 times annual revenues and roughly 10 times EBITDA.

The deal with Bushnell comes after the smaller acquisition of Savage Sports Corp in June, which added centerfires, rimfires and shooting range systems to the business. The second deal this year, marks a fundamental shift. Alliant has moved its focus to the faster growing, and more stable shooting sports business. The company moves away from reliance on the defense industry, a nice move given the fiscal consolidation efforts.

Following the deal, Alliant has boosted its sporting business revenues to 45% of total revenues. The deal is fair, and results in a more stable operating performance, although net debt will increase towards $2 billion following the deal.

Trading around $96 per share, the market values ATK at $3.07 billion. This values the equity of the business at 0.7 times annual revenues and 11-12 times annual earnings. The accretion following the deal might boost earnings per share by little over 10% going forwards.

Alliant Techsystems currently pays a quarterly dividend of $0.26 per share, for an annual dividend yield of 1.1%. So far the market has been enthusiastic about management's focus on sporting goods as shares have doubled over the past year.

Despite the solid deal I remain on the sidelines. Typically an 11-12 times earnings multiple seems attractive. Yet the increased scrutiny of the business and the built up in leverage provides a drag after the significant momentum. On top of that comes the lack of growth in operations in recent years.

So while I am hesitant about the short term prospects, the long term outlook remains rosy. The sporting business should be less dependent on mass shooting incidents or fiscal consolidation, warranting a higher multiple for the overall business in the long term.

Source: Alliant Techsystems - Short-Term Pressure, Long-Term Prospects