Wind Point Partners cashed in on its Pacific Cycle investment, selling the bicycle company to consumer product distributor Dorel Industries in a transaction valued at $310 million. The deal is expected to close in the first quarter.
The sale marks the end of Wind Point’s nearly six-year investment in Pacific, a holding period that began in 1998 with the $37 million recapitalization of the company. The recap-in which Wind Point made a roughly $5.5 million equity investment-gave the firm an approximately 60% stake in the business, and set the stage for an acquisition spree that saw the bicycle maker quickly become the market-share leader in the U.S.
“When we acquired Pacific, the company had a very thin management team, it sold to just one primary customer and it only had the Pacific brand to sell,” said Rich Kracum, a managing director with Wind Point. “We made the investment because we believed it had great potential and felt that with the existing management we could transform the business over time.”
To grow the company, Wind Point relied heavily on acquisitions to broaden its product line and brands. In December 2000, Pacific kicked off its buying binge with the $60 million acquisition of Brunswick Corp.’s bicycle division, which added the Mongoose and RoadMaster brands to the Pacific platform. The company followed up in 2001 by acquiring the bicycle assets of Schwinn/GT Corp. in an $86 million bankruptcy deal. And in 2003, Pacific added jogging baby-stroller maker InSTEP to its platform in a roughly $25 million purchase. To finance the add-ons, Wind Point made an additional investment to assist the acquisition of Brunswick, while the Schwinn/GT Corp. and InSTEP deals were both financed entirely with company debt.
To spur Pacific’s organic growth, Wind Point bolstered the management team and helped the company broaden its distribution to the mass merchants. “Our thesis when we acquired this company,” Kracum said, “was that while it was a relatively small business, it was the only company that was sourcing its manufacturing overseas. Also, at the time, Pacific was the only company dedicated to the mass channel, and both of those elements were critical to its success.”
Since the 1998 recap, Pacific has expanded its distribution from one mass retailer to many, and now sells to such names as Wal-Mart, Target, Costco, Dick’s, The Sports Authority and Toys “R” Us, as well as a number of independent bicycle dealers that serve the local markets. The company has seen its annual revenue grow from $80 million in 1998 to more than $325 million today.
The success of Pacific has come at a time when the bicycle market in the U.S. has faced a relatively stiff breeze, and in most cases, private equity investors have felt the brunt of the industry’s downturn. Thayer Capital Partners, Perseus Capital and Soros Equity Partners saw their investment in Derby Cycle fall flat after the company filed for bankruptcy protection in 2002. Questor Management, meanwhile, lost a reported $70 million through the bankruptcy of Schwinn/GT, and Cannondale, another struggling bicycle maker, also filed for bankruptcy (and was later acquired by Pegasus Capital Advisors).
Wind Point, however, was able to capitalize on the weak market through outsourcing the manufacturing to the Far East, allowing the company to weather the industry’s downturn while strengthening its influence among the Far East manufacturers. The downturn also allowed Pacific to consolidate the industry and bolster its presence without giving up too much in return.
Kracum could not disclose the IRR on the Pacific investment other than to say it was more than 50%, although he did note that the investment included preferred equity from Wind Point limited partner The State of Wisconsin Investment Board. The equity for the investment came out of Wind Point Partners III, the firm’s 1997-vintage, $215 million fund.
For Dorel, the acquisition allows the company to enter another industry segment through which it intends to push forward its consumer products strategy. The Canadian company already has a foothold in the juvenile product and home-furnishing markets, and the purchase of Pacific will give Dorel another industry leading consumer product company to add to its stable. Dorel intends to keep management on board, and Founder Chris Hornung will continue to run Pacific as a standalone division.
Buyer: Dorel Industries
Target: Pacific Cycle
Seller: Wind Point Partners
Purchase Price: $310M
Advisor: WPP: CIBC World Markets
Lawyer: WPP: Sachnoff & Weaver