Outboard Marine to be Acquired fo $500 million

Detroit Diesel to Buy Outboard

Outboard Marine to be acquired for $500 million

Wednesday July  9,  1997
By Kevin Drawbaugh
CHICAGO (Reuter) - Outboard Marine Corp., the largest U.S. maker of outboard engines, agreed Wednesday to be acquired for about $500 million -- a price so low that one investor called the deal a ``take-under'' rather than a takeover.

Detroit Diesel Corp., a company controlled by closely held Penske Corp., will pay $16 per share in cash and stock for Waukegan, Ill.-based Outboard, which is also the nation's second-largest recreational powerboat manufacturer.

``It's a good acquirer. It's someone who knows how to run manufacturing operations, but I'm surprised that that's all they can get for this company,'' said James Schmitt, head of Westcountry Financial, an investment firm in Somis, Calif.

Outboard Marine stock closed down $3.625 ato $15.875 in trading on the New York Stock Exchange, after a run-up over the past week driven by acquisition rumors that had pushed the stock as high as $19.

``Whoever bought this stock in the last few days is going to be very disappointed,'' said Michael Pizzi, an industry analyst at Standard & Poor's Equity Group in New York.

Said one Outboard investor of the purchase price: ``It's a take-under. It just shows the trouble the company has had.''

Detroit Diesel stock added $2.125 to $25.875, also on the NYSE. Analysts said the Detroit-based Penske unit recently signaled increased interest in acquisitions. But it was low on the list of likely buyers of Outboard, which put itself up for sale in April.

``It was a little surprising that Detroit Diesel wants to get involved in this business,'' one Outboard investor said.

Outboard Marine Chairman Harry Bowman said the company talked with several companies before agreeing to the Detroit Diesel deal.

``We talked with a number of people from a variety of different backgrounds,'' Bowman said in an interview. ``We had a very good selection of companies. So I was pleased with the way the whole process went.''

Detroit Diesel makes heavy-duty diesel and other engines for trucks, buses, cars, boats, military vehicles, power generation and construction, mining and industrial equipment.

The deal significantly changes Detroit Diesel, formed in 1988 when Penske acquired General Motors Corp.'s ailing big-truck diesel engine business. It will now have expertise in marine engines ranging from 5 to 10,000 horsepower.

Detroit Diesel's annual sales will rise to more than $3 billion annually, with Outboard becoming the largest business segment with over $1.2 billion in revenues -- $800 million from engines and $450 million from boats.

Outboard has an innovative fuel-injection technology called FICHT that it put into some of its engines this year and which likely was a major lure for Penske, analysts said.

``We look forward to the prospect of further developing OMC's proprietary FICHT fuel-injection technology to optimize performance, fuel economy and emissions capability for the next generation of marine and other engines,'' said Detroit Diesel Chairman Roger Penske, the auto racing entrepreneur.

Analysts said Outboard's struggling powerboat business was probably less attractive to Penske.

``I'd expect Detroit Diesel to seriously consider spinning off the boat side of the business,'' said Harriet Baldwin, an industry analyst at the Lehman Brothers brokerage and investment bank in New York.

What profits there are in the U.S. recreational powerboat market in recent years have come from building big boats, a business led by Lake Forest, Ill.-based Brunswick Co., the nation's largest powerboat builder.

Outboard Marine, despite having top-flight names like Chris-Craft and Four Winn in its fleet, failed to follow the market shift to big boats from small boats in the early 1990s and has struggled ever since, analysts said.

``Outboard has a lot of problems. Detroit Diesel is probably acquiring it at a fair price, but it's still a tough industry right now,'' Pizzi said.

Detroit Diesel may consider divesting the boat business in the future, but added that its first priority is to bring the business back to a break-even position, Penske said in a teleconference following announcement of the deal.

``I certainly don't want to indicate that overnight we're going to have a fire sale in the boat business. That would be a big mistake,'' Penske said. ``We think there's some strong brands, there might be some opportunities to partner with other boat companies to take those brands.''

Some plants may be closed, but Detroit Diesel would not elaborate. Administrative opertions will likely be rationalized, but a significant presence will be maintained in Waukegan, the company said.

Detroit Diesel Vice Chairman Timothy Lieuliette said the deal will be ``accretive from the get-go'' for shareholders.

In 1998, the deal will add 5 percent to 10 percent to earnings if problems in the boat business are not addressed, and 30 percent to 40 percent if the boat problems are addressed, he added.

Copyright © 1997 Reuters Limited.

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