Pegasus rides Cannondale to healthy return

Pegasus Capital Advisors saw a turnaround prospect when it bought Cannondale Bicycle Corp. out of bankruptcy in 2003. Four years later, after a competitive auction, the Cos Cob, Conn.-based buyout firm sold a leaner, healthier Bethel, Conn.-based Cannondale Bicycle to Dorel Industries for between $190 million to $200 million, representing a 10x EBITDA multiple.

Dorel Industries CFO Jeffrey Schwartz says that the lack of competition from LBO shops smarting from the credit crunch kept pricing relatively low.

“Had we not had this crash, private equity [firms] would have made [the auction] more competitive,” he says.

Still, strategic buyers such as Trek Bicycle Corp. and Specialized Bicycle Components showed healthy interest in the company, which generates just under $20 million in EBITDA each year. For its part, Dorel Industries had had its eye on the business since it entered the bicycle industry, says Mitchell Schaffer, managing director at investment bank Stifel Nicolaus and the buyside banker for the buyer.

Dorel (TSX: DII), a publicly traded Montreal-based company, known for making strollers, car seats and furniture, bought into the biking industry in 2004 when it acquired Pacific Cycle for $350 million. Pacific Cycle, the maker of Schwinn and other mass-market brands, looked at, but ended up passing on, Cannondale Bicycle when the company was last on the block in 2003.

Not so for turnaround specialist Pegasus Capital, which saw plenty of value in Cannondale Bicycle even after the company had hit a dead-end with a failed foray into the motorcycle industry. Pegasus Capital had already provided a private line of debt to Cannondale Bicycle and offered an undisclosed sum for the company as its stalking horse bidder in 2003.

Upon assuming control, Pegasus Capital nixed motorcycles, brought in CEO Matt Mannelly, and reinvested in the company’s specialty bicycle business. The back-to-basics theme worked. Under Pegasus Capital’s watch, Cannondale Bicycle’s top line grew between 30% and 40% to $200 million in 2007.

Dorel Industries has no plans to merge Cannondale Bicycle with Pacific Cycle. The businesses each generate nearly identical EBITDA. But because Pacific Cycle competes on price and not brand, the company has “significantly” lower gross margins, Dorel Industries CEO Martin Schwartz said in a conference call discussing the deal.

As with past acquisitions, Dorel Industries borrowed to cover the entire purchase price. Royal Bank of Canada agreed to syndicate the transaction’s debt. The sale of Cannondale Bicycle returns cash to Pegasus Capital’s second fund, which closed in 2000.

The firm is now investing in distressed companies and other special situations from its third and fourth funds, which have capital commitments of $316 million and $750 million, respectively. —Erin Griffith