Outdoor financial: Jarden to acquire K2; both companies release Q1 earnings reports

Jarden Corp. (NYSE: JAH), a diversified consumer products company with brands such as Coleman and Campingaz, has signed a definitive merger agreement to buy K2 Inc. (NYSE: KTO) in a cash and stock deal valued at about $15.50 per share, or $765.9 million, the companies said.

Under terms of the deal, Jarden will pay $10.85 per share in cash and issue 0.1086 share of its stock for each share of K2 stock outstanding at closing. Including assumed debt, the deal is valued at $1.2 billion.

Based in Carlsbad, Calif., K2’s portfolio of brands includes Adio, ExOfficio, JT, K2, Marker, Marmot, Penn, Rawlings, Ride, Sevylor, Shakespeare, Stearns, Volkl and Worth.

The deal is aimed at boosting Jarden’s profitable outdoor division, which includes sleeping bags, backpacks and tents currently sold under the Coleman and Campingaz brands. Earlier this month, Jarden bought Pure Fishing Inc. in a cash and stock deal valued by analysts at $390 million to $400 million.

The K2 deal, which is expected to close in July, would immediately add to Jarden’s earnings, Jarden Chairman and CEO Martin Franklin said in a conference call with analysts and media. Currently, Jarden annualized revenue is approximately $4.2 billion and with the addition of K2, will rise to an estimated $5.6 billion. The deal is also expected to produce cost savings of $25 million to $50 million, Franklin said during the conference call.

The board of directors for both companies have unanimously approved the transaction, which is expected to close during the third quarter of 2007, subject to Hart-Scott-Rodino approval, the approval of K2’s stockholders and other customary closing conditions.

Additionally, Jarden will announce a three-for-two stock split after the K2 acquisition closes.

The acquisition announcement was timed with each of the company’s first-quarter earnings reports on April 25.

Jarden’s first-quarter profit fell as a result of one-time charges. It earned $1.4 million, or $0.02 per share, compared with $5.7 million, or $0.09 per share, for the same quarter in 2006. Excluding one-time charges, the company posted an adjusted profit of $21.4 million, or $0.30 per share, up from $16.1 million, or $0.24 per share, for the 2006 period. Revenue rose 3.7 percent to $820.9 million from $791.7 million in the year-ago period.

K2’s first-quarter earnings increased to $4.8 million, or $0.09 per share, from $3.6 million, or $0.08 per share, in the previous year. Adjusted net income rose to $7.1 million, or $0.14 per share, from $5 million, or $0.10 per share. The current quarter had more outstanding shares than the year-ago period. Its revenue for the quarter gained 7 percent to $372.7 million versus $348.1 million in the prior year.

K2’s shares hit a new 52-week high on April 25 — up $2.60 to $15.18 during trading on the New York Stock Exchange — after news of the acquisition was released. It closed the day at $15.10. The stock has traded between $10.02 and $14.45 during the past 52 weeks.

SNEWS® View: Perhaps the most stunning quote we have heard from an executive in recent years during conference calls was made by none other than Dick Heckman, K2’s chairman and, by his tone, an ardent Jarden cheerleader. Following a question from an analyst, he justified the sale of K2 to Jarden by saying Coleman and Pure were perfect fits with them since K2 had previously tried to acquire both but failed because of lack of capital. And then he delivered the stunner by stating, “The retailers want bigger, stronger, fewer vendors and quality branded vendors, and the conversations (with retailers) that I had yesterday were very positive.” Not sure who Heckman chatted with, but it was certainly not any retailer in the outdoor specialty market SNEWS® is familiar with. And that statement sure has to put the warm fuzzies into the hearts of any entrepreneurial soul who is thinking of launching the next, great product on their own.

But enough of that. What of the new company and what might this mean? Frankly, not much in the short term we would suspect. Same companies and management, different owner. Under Jarden’s ownership, Coleman and Campingaz have done quite well (last quarter where Coleman’s numbers slipped a bit year-over-year notwithstanding). With the acquisition, the new company will have approximately 25 percent international sales and 75 percent domestic, with international sales currently in 100 countries. International growth is certainly a strong expectation

It was no surprise to hear Jarden CEO Martin Franklin state that the company would immediately look to leverage K2’s technical apparel team (read Marmot, ExOfficio and Marker) to launch a Coleman apparel line. That move shouldn’t make any company nervous unless it sells into a broader than specialty market, and then, the launch of a new apparel line, even a branded one with a name such as Coleman, is no sure bet of success.

Long term, one wonders about integration of various systems and how that might affect all sorts of things from production to orders to deliveries. There haven’t been too many companies in recent memory that have experienced hiccup-free integration, and this one is about as complicated as it comes from an outsider perspective.

All that said, Franklin is no stranger to acquiring companies with recognized brand equity but currently on a slow growth curve, and then juicing up the works successfully. And, thus far, it is hard to question the results. However, he’s now playing in a slightly different market with a bit more stake in that game, since, by his estimates, 42 percent of his company’s revenue will come from the Outdoor Solutions group. And that, alone, may create some unanticipated pressures, as well as some unexpected opportunities. Only time will tell.