On Monday morning, July 8, Vista Outdoor (VSTO) investors finally received the news they were waiting and waiting and waiting and waiting for: Vista Outdoor closed a deal to sell its Savage Arms firearms brand. The company announced the disposition of the Savage Arms brand in a $170 million sale:
Divesting our Savage brand was a key aspect of our transformation plan," said Chris Metz, Chief Executive Officer of Vista Outdoor. "While it was a difficult decision to sell such an iconic brand, I remain confident that this was the correct choice to help Vista Outdoor grow in those categories where we can have leadership positions. Savage is a fantastic business, and it deserves to continue to evolve into other firearms categories. At this time, however, we simply do not have the resources to transform Savage into the full-service firearms company that it deserves to be and, therefore, we determined the brand would be better off with a different owner. We're excited to see Savage reach its full potential under new ownership. [Source: Vista Press Release]
Why Sell Savage?
For those not familiar with or are newer investors in Vista Outdoor, some background follows:
ATK, the former parent company of Vista Outdoor and other brands, acquired Savage Arms in 2013 for the reported price of $315 million.
This occurred during the ROI-chasing period that followed the 2012 Aurora, Colorado, and Sandy Hook tragedies. As experienced firearms owners and investors will recall, 2012 and 2013 were extremely successful years for firearms businesses as gun owners and prospective gun owners rushed out to purchase firearms and ammunition before potential new gun legislation.
This massive surge in demand, combined with the fairly constrained supply, sent prices skyrocketing on more firearms and, in turn, made companies quite profitable.
This in turn attracted institutional investors, which may not have quite understood the firearms business, but did understand good ROI figures.
Combined with the talk of a potential liquidity event for the Cerberus Freedom Group, everyone wanted to get in on a "diversified firearms and outdoors company" business model.
During this time, ATK acquired Savage Arms and numerous other brands you now see under the Vista Outdoor corporate umbrella.
In 2015, ATK decided to package and spin off its firearms and outdoors brands into Vista Outdoor Inc. Unfortunately, with the spin off, VSTO investors also inherited significant debt.
Combined with questionable management and the significant slowdown in firearms and ammunition sales after the election of President Trump, Vista Outdoor found itself with major problems.
Under new leadership, Vista Outdoor began refocusing and reorganizing, starting with meaningful cost-cutting and the sales of certain brands. Savage Arms was a long-anticipated sale.
Investors learned of the company's intention to divest its firearms business a little over a year ago, with a sale expected to be announced by fiscal year end.
Over the interim quarters, investors were told on conference calls that there was very strong interest from multiple bidders. As recently as February 2019, the company estimated that its "assets held for sale" - Savage Arms - was valued at $236 million, and expected to bring in around $210 million in proceeds after an initial $83 million impairment charge:
And now as we come toward the end of the fiscal year, we have the divestiture of savage within our sites where we had a deep and competitive field of bidders. And we'll have more to announce by the end of March. We're confident that once we sell savage and use the proceeds to further pay down debt, we will be in a much better situation and that will provide us with some additional options moving forward.
In the most recent quarter, the company updated the asset value to $170 million, factoring in an additional impairment of $39.6 million, bringing the total impairment charge to $120 million.
At the end of the day, the company was sold to a group of investors led by current Savage Arms President and CEO Al Kasper.
My biggest question around the sale is why the price was so low.
Management has, over the course of several quarters, given an answer that seems to make sense: Since President Trump took office, firearms sales have taken a severe tumble, and so have the share prices of publicly traded firearms stocks.
Since election day 2016, when I started warning investors, American Outdoor Brands (AOBC) and Vista Outdoor shareholders have endured share price declines of 68.33% and 77.99%, respectively. Ruger (RGR) investors came out the "winners" with a 16.27% loss:
In that context, taking a 46% loss on your investment in Savage does not seem out of line. But Savage was not purchased on Election Day 2016. It was purchased in early 2013, prior to the election-induced sales boom.
Since May 1, 2013, the market capitalizations of Ruger and American Outdoor Brands have declined by just 1.77% and 10.5%, respectively.
Thus my question: Why the massive valuation drop?
Did ATK overpay? Did Vista Outdoor accept a super-low offer? Has the market simply dropped since 2013? Or has the the business been mismanaged since the takeover?
While there's been a definite drop in background checks and sales from 2013 to 2019, it is certainly not a 40% drop.
Furthermore, looking at the company from the outside, I believe Savage has done a tremendous job growing its product portfolio since the acquisition, and I doubt its sales have declined much from 2013.
As such, I believe ATK likely overpaid. And as time went on, the value of Savage continued to fall over the sales process.
While I understand why Vista Outdoor divested Savage, I personally do not believe it was the best long-term move. Through investment thinking, the company bought high and sold low.
Savage is certainly a higher-volume firearms producer, and I do not believe its revenues were that low. More than that, I question the timing of the sale: at or near the likely intermediate-term market bottom, and with less than 12 months until the Democratic presidential hopefuls start taking stands on gun policy.
At the same time, we have companies like Deutsche Bank (NYSE:DB) warning of billion-dollar losses, a very pessimistic Treasury Yield Curve, and many economists expecting upcoming Fed rate cuts - all signs of impending recession.
So why not focus on selling some of the non-firearms Outdoor brands instead? Ultimately, I believe it is about paying down the debt. But I question the decision to sell off longer-term revenue sources at or near their valuation lows.
Where this all goes is the general discussion of what exactly Vista Outdoor is, and what exposure it provides investors.
Over the years I have looked at the three publicly traded companies -Ruger, American Outdoor, and Vista Outdoor - as complementary investments. While Ruger provided a pure play on firearms, American Outdoor provided some more diversification to include firearms accessories. Vista Outdoor was primarily, in my mind, a company that provides exposure to ammunition.
With the sale of Savage firearms, Vista is now in ammunition, lots of firearms accessories, and the complete opposite side of the spectrum - camping supplies, backpacks, water bottles, and helmets. The question is: How many synergies can there be among so many different brands?
It is not as out-of-left-field as a company like Clarus (OTC:CLAR), which purchased the bullet and ammunition brand Sierra, running it under the same umbrella as Black Diamond climbing equipment and SKINourishment skin care brand. But I don't believe Vista has the ability to maximize each brand's potential.
For instance, you have a limited number of sales staff. While you are likely trying to sell RCBS reloading presses, Bushnell rifle scopes, and Alliant gunpowder to the same customers who buy Federal and Blazer ammunition, you are probably not trying to sell them Camp Chef stoves, Bell helmets, or Copilot bike carriers.
As a potential investor, I need clarity on where the company believes it is most effective, and want it to focus there. Vista is not Walmart (WMT); even diversified giants like Amazon (AMZN) have their core competencies. Why not become either an outdoor lifestyle brand, spinning off firearms/ammunition - or become a firearms and ammunition giant, and move away from the distractions? Perhaps then I would be able to find a few pounds of Alliant Reloder 26 powder, which the five or six dealers near me have been unable to get for close to a year.
We all know, it's not about how much you make, but about how much you keep. My focus will be on the latter - making sure you preserve the income that you earn.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.