Wind Point Gears Pacific Cycle for Growth –

Chicago-based Wind Point Partners learned this month that it’s not easy to be everything to everyone but it’s not impossible. The firm, which spends a notable amount of time building its portfolio companies, this month added the bicycle assets of Schwinn/GT Corp. to Pacific Cycle LLC, making the platform a strong player in both the mass merchant and the independent bike dealer markets. Wind Point’s bicycle platform now sports such recognizable names as Pacific, Mongoose, Roadmaster, Schwinn and GT.

However, Pacific Cycle served a much smaller audience before Wind Point came along.

In June 1998, Wind Point took the first step in building its bicycle platform by recapitalizing Pacific Cycle, based in Madison, Wis., and taking a majority stake in the company. The transaction was financed with equity from Wind Point Partners Fund III, an asset-based line from Associated Bank and mezzanine debt from CIT Group.

“We came across Pacific Cycle and it was one of the pioneers in launching the effort to source bikes from overseas and be very cost-effective as a result,” says Rich Kracum, a managing director at Wind Point. “The bike market has been around forever. It’s very stable, growing very slowly. However Pacific Cycle was cost advantaged and due to the cost-advantage, it had terrific growth.”

With the company’s focus on the mass merchant channel of the industry, its established manufacturing and sourcing relationships in Asia, and the strength of its management team, Wind Point was confident in its strategy of starting with “the low cost competitor,” Kracum says.

Clearing the Path

From the time Wind Point purchased Pacific Cycle, the goals were clear: to diversify the customer base and to build on the already strong management team.

“Toys R Us was a very dominant customer for the business, and we felt that with Wind Point’s involvement we could expand that customer base,” says Kracum. “[And] while the management team was exceptional, it was thin and wasn’t broad enough.”

Indeed, after applying itself to those efforts, Pacific Cycle’s Ebitda doubled over the next two years jumping to approximately $140 million in revenue from $70 million at the time of the purchase.

As Wind Point predicted, Pacific Cycle’s strategy of manufacturing and sourcing its bicycles abroad became an influential force in the marketplace. “The domestically produced competitors ran into very difficult times because it was impossible for them to stay competitive with us on pricing,” says Kracum. “During this time period in the late 90s, they all shut down their domestic manufacturing, which was a really gut-wrenching exercise for them all.”

Secondly, Pacific Cycle’s growth began to turn consumers from the independent bike dealerships to the mass merchant channels, spurring major changes in the industry. “As the quality of bikes in our success with the mass merchants increased, it really came at the expense of the independent bike dealer, whose historical strength was to provide much higher quality bikes than what was historically provided at the mass merchant level,” Kracum says.

Ready to Pounce

These trends took Wind Point toward its first add-on transaction for Pacific Cycle in December 2000. Feeling the repercussions in the bike industry Brunswick Bicycles, based in Lake Forest, Ill., was encountering significant financial difficulties and was forced, like others, to close its domestic production. The company, which had purchased both the Mongoose and Roadmaster brand names, concluded that the bike assets had to be sold. Brunswick’s chief executive officer promised its shareholders that the assets would be sold by year end, creating a very short time frame to complete the transaction. “We were ready,” says Kracum. “We had contemplated the possibility of doing an acquisition at the very outset of our investment as we do with almost all our investments so we were poised and ready . . . and none of our competitors were.”

However, as no surprise to any GP in the market a year ago, financing was not easy to come by. In the end the $60 million deal closed with equity from Wind Point Partners Fund III and Chris Hornung, the founder and CEO of Pacific Cycle, and a credit facility from General Motors Acceptance Corp. “One of the things that we needed from [GMAC] was certainty that they could get this deal closed by the end of the calendar year, which was critical to the deal,” says Bradley Schmarak, a partner at Sachnoff & Weaver, which acted as legal counsel for the buyers. “GMAC was one of the few lenders that had the capability to underwrite the entire facility and then worry about syndication afterwards. They stepped up to the plate and did a real good job with that.”

Combined, Pacific Cycle and Brunswick Bicycle had a 38% market share of bicycles sold in the U.S. and almost $500 million in sales at the time of the transaction.

With two new brand names to market to mass merchants and the Mongoose Pro product line of BMX and mountain bikes marketed to independent bike dealerships (IBD), Pacific Cycle was even closer to having a diversified customer base. Additionally, Pacific Cycle gained a distribution center and improved fulfillment capabilities with the Brunswick add-on.

As it would with the Schwinn/GT acquisition, Wind Point evaluated the members of the Brunswick management and kept its strongest players to build on the Pacific Cycle team.

“The management team was extraordinarily successful in bringing the Mongoose brand name, which was a high profile, well-known, mountain bike in the IBD distribution chains, into the mass merchant chains,” says Schmarak.

Through those efforts Pacific Cycle was able to bring Mongoose to such mass merchants as Toys R Us, Wal Mart and Kmart.

“It was that success in bringing in an independent bike name into the mass channel that really gave us the confidence that we could go after Schwinn and bring it into the mass channel,” he says.

The Gold Ring

By mid-2001, Pacific Cycle was moving quickly toward the grand prize of brand name acquisitions. Through business relationships of Hornung, the company had already won the rights to the Murray brand name and now Pacific Cycle had its sights set on Schwinn/GT.

Schwinn/GT Corp. had been teetering financially for the better part of the 1990s. It was rescued from Chapter 11 bankruptcy in 1993 by the Scott Sports Group. In 1997, private equity firm Questor Partners purchased Schwinn/GT. Then this July the trend started again as the company entered Chapter 11 for the second time. Wind Point saw its opportunity and had already turned to its legal team at Sachnoff & Weaver to begin due diligence and plan their acquisition strategy. Schmarak, who worked with Wind Point on the Brunswick deal, was intimately familiar with the proceedings, having been part of the first Schwinn/GT bankruptcy acquisition in 1993.

“Schwinn is by far the strongest brand in the bike industry. Frankly, it is an icon brand and one of the strongest brands, we believe, in the U.S.,” says Kracum. “We always kept our eye on the company and recognized that they were having difficulties.”

The fight for such a strong brand, however, was not easy. “There were two very interested buyers in the cycling division (Schwinn/GT was also selling its fitness division), neither of whom necessarily wanted those assets, but both of whom didn’t want the other entity to acquire the assets,” says Schmarak.

The proceedings quickly became a showdown between Huffy Corp. and Pacific Cycle. Huffy attempted to keep Pacific Cycle out of the bidding by claiming it would be anti-competitive because Pacific’s bikes were sold in mass channels. The legal team was able to keep Pacific in the game by arguing the opposite. “Whereas Huffy would have completely abandoned the IBD market, and therefore a strong brand would have been eliminated, our specific strategy was to work through the IBD market while also eventually considering rolling it out into the mass market,” says Seth Hemming, another partner at Sachnoff & Weaver who acted as legal counsel.

Huffy, which was granted stalking horse protection, took the upper hand throughout most of the bankruptcy acquisition. Pacific Cycle was viewed by its opposition as an unrealistic competitor and mere interference.

“During the negotiations with the debtor and CSFB [who was retained to sell the business], it became apparent to us that Huffy had an earlier start and I think we felt like we were always a little bit behind the ball,” says Schmarak. “We were getting calls from the bankers and lawyers towards the end of the day instead of the beginning of the day. Not withstanding our efforts to get caught up, we felt that we were always a bit behind because the debtor and its investment banker were focused first on their negotiations with Huffy.”

There were doubts as to whether Pacific Cycle would be able to pull together the financing needed to complete the deal. In fact, if the auction had taken place in August, as Huffy was suggesting, the company would not have the resources to seal the deal. However, an unlikely decision by the judge put time on Pacific Cycle’s side, making all the difference.

The debtor, senior lenders and the unsecured creditors presented these doubts to the judge and pushed for an auction Aug. 22. The judge suggested that Pacific Cycle prove its credibility. The company offered three solutions: to put down $1.5 million in earnest money and agree to overbid Huffy by $5 million; to pay Schwinn/GT’s expenses for the time difference; and finally to make a replacement stalking horse bid of $5 million more than Huffy’s bid. All were denied by the opposition. Then the judge made a “shocking” decision to push the auction off until Aug. 10.

With the extra time, Wind Point was able to pull together enough financing for Pacific Cycle to bid another $26 million more than the Huffy bid.

On Sept. 20, Pacific Cycle purchased the bicycle division of Schwinn/GT for $86 million. (The fitness division went to Direct Focus,which partnered with Pacific Cycle in a joint venture.) The acquisition was financed with equity from Wind Point Partners Fund III, and preferred equity from Wilton Private Equity, an affiliated fund of Dupont Capital, and a direct investment from one of Wind Point’s limited partners. GMAC again acted as the senior lender, leading the syndicate.

Presently, Pacific Cycle sources approximately 6 million bicycles annually. Wind Point’s Kracum says the firm is content with Pacific Cycle’s diversified customer base. “I think our customer base completely reflects what the industry is,” he says.

Moving forward, Pacific Cycle will be taking a break from add-ons to “digest this fairly sizable acquisition,” says Kracum.

However, the plans continue.

“We think there is a terrific amount of profit improvement that we can achieve utilizing the business model that we have, and it will probably take a year or two to effect that,” says Kracum.