What's Next for OMC?
by Mr. Wizard
Full Coverage of OMC Situation
By Mr. Wizard 19 Dec. 2000 Right before all heck broke loose with the OMC situation, many asked us what might happen to OMC, who might purchase them, etc. We decided to ask our old friend, Mr. Wizard, to comment on the situation. His speculations below are based on events over the last few years and a little wizardry.A number of problems placed OMC in this perilous position.
What is the current outlook at OMC?
In a word, BLEAK !
What are the options?
As time wears on, looks like OMC is not the type to apply this technique, perhaps the next crew may Shackleton's Techniques useful.
Internal buy out seems unlikely. Many major execs, including Jones, have left the ship. The remaining crew may not be able to raise the funds necessary among themselves and their bankers. A group of industry executives (past and current OMC execs, Brunswick execs, etc) might ban together to buy them out.
Leveraged buy outs are always possible. But if it was a good option, OMC would just sell the pieces themselves. More on this later.
Liquidation in any form is very painful. Any intangible value in the business name, tradenames, image, goodwill, etc. would not be recovered from liquidation. Too much money would be left on the table for Greenway to take this route. If the business becomes priced as a very small fraction of its annual sales (marketed as an ongoing concern in grave trouble), the liquidators may begin to bid. Those interested in the business as an ongoing concern would hopefully value the business more highly for its intangible assets and raise the bid.
Takeover by another investor group might become a possibility. If nobody else wants or can purchase the remains of OMC and prices go to near liquidation levels, an investor group may decide to take a chance on them (especially based on OMC's intangible worth).
Bankruptcy seems unlikely. They have already made a valiant attempt to raise from the ashes and failed. Greenway wants out. Just closing the doors and walking away leaves money on the table. Greenway want everything they can get on the way out.
Fri. 22nd bankruptcy now seems more probable. It may just be a step on the way out enabling Greenway and the eventual future purchaser to walk away from some of the debt.
OMC is composed of:
Drive manufacturing and assembly
Outsourcing and the sale of their interest in the Volvo-OMC joint stern drive operation has moved them from a manufacturer of drives toward being an assembly operation. Drive manufacturers are not looking for additional capacity. Ficht drives are cool, but other manufacturers have poured millions of dollars into developing their respective technologies and don't want to try to integrate another one. The drive business is a lemon.
In the industry, several excellent, well managed boat companies might command a premium price because they differentiate their products from the sea of competitors, are well managed and serve their customers well. On the other hand, there are hundreds that are a "dime a dozen". In the past, boat companies were very easy to start and required little overhead to operate. They were bought and sold like popcorn. If you were to say OMC's boat companies are among those well managed and capable of commanding premium pricing, even if you bought them, you would have to prove to the public you were capable of similar management and customer support. Bottom line, the boat companies offer little to potential buyers unless they can go vertical (new buyer is a drive company or fiberglass company, etc). If the buyer is able to increase or guarantee sales of their product (drives, fiberglass, etc) they may have some value, especially since this offers an opportunity to purchase several at boat companies at once at a good price. They also offer major brand recognition (trademark) which might be transferred to other products. The drive companies are a mixed bag.
Liquidators buy inventory at fire sale prices. It might generate a little cash, but once its gone, its over.
The financial services operation is of no value without the builders (nothing to finance).
Parts & Service
OMC's parts and service operation might be a plum. Hundreds of thousands of units in the field will continue to need service parts for decades. Now that many of the components are outsourced, it should be much less reliant on the production operation. Also, many major manufacturers turn to their parts & service business for revenue when sales slow (anticipated downturn in the industry)
Intellectual Property, including Trademarks
Access to Ficht technology (including revenues from licenses in other industries) is another plum.
Their greatest value may lie in trademarks and goodwill. The value of the OMC name and related trademarks (Evinrude, Johnson, Chris-Craft, Stratos, Four Winns, etc.). Others might be able to market all sorts of products, even outside the marine industry, under these well established names.
The dealer/distribution network is another plum. Many would like access to their well established service and distribution network.
Facilities and Land
As mentioned earlier, those currently in the industry do not need additional capacity. Many of the facilities are built on land with EPA "problems", making them difficult to sell. The facilities and land are worse than lemons.
Valuable pieces of OMC appear to be the boat companies (vertical integration opportunities for some manufacturers), the parts & service operation, Ficht technology, the trademark "names" and the dealer network. The value of these components make it very unlikely, OMC would just shut the doors and walk away. But, the possibility exists someone might buy them and liquidate all the resources. Greenway may not want to assume the role of liquidator and leave it to another group.
In terms of possible acquisition candidates:
How much are they worth?
OMC's worldwide sales in 1998 and 1999 were between 1 to 1.1 billion dollars. Ongoing manufacturing concerns often sell for something of the nature of 70% to 100% of annual sales. If they are making about 10 percent profit, 10 years will payback the investment. In this case profits are hard to come by. You are buying a turnaround, not an ongoing business. Some say boats are a hole in the water you pour money into, OMC could be the same thing. Sale of the entire unit would have to be at fire-sale prices.
Last go around, Penske offered $323 million and a stock tender (about $16 a share). Greenway upped the bid to $18 a share. The turnaround proved very difficult for Greenway and we assume Penske is happy he lost the bidding war.
Plus we need to remember there is less there than before. They sold their portion of the stern drive operation and some boat companies.
Until the just announced month-long Christmas shutdown, I would have expected them to go for something in the neighborhood of $160 million (45% to 65% of last time's price). But, the month long shutdown seemingly kills all hopes of survival and creates a buyers market. $100 million might buy them. That would be quite a bargain based on sales (only 10% of annual sales) but it still has to be turned around (or leveraged or liquidated). Most execs would have a very tough time convincing their board to buy them as an ongoing operation for over $200 million, but they might convince them to buy them and cut them up.
Their 1999 10K shows $11 million in land and improvements, $63 million in buildings, $146 million in machinery and equipment. Much of the land may have EPA "problems" (except 5 regional distribution centers and office "only" areas). The buildings come with the land problems and machinery is specific to their needs. Also note, book value may widely differ from market value. Their June 30, 2000 balance sheet shows $877 million in assets of which $78 million is in tradenames, trademarks, patents and other intangibles. It's a cinch they will sell for a lot less than that.
Brunswick paid $425 million and $350 million respectively for Bayliner and SeaRay in 1986. Immediately afterwards, OMC purchased 5 boat companies for $120 million. These BC and OMC acquisitions were at amounts far about current book value. OMC's boat group generated about $460 million in sales in 1999 per their 10K report. The same report indicates environmental remediation liabilities of $21 million. Any takeover would leave all existing debt, liabilities, warranties, pensions, etc with Greenway.
The stock value of many potential buyers has dropped significantly in recent days.
Bottom line, if OMC is acquired and all debts are left with the seller, expect a sales price of $100 to $200 million.
Many companies say their people are their greatest asset. Since this article was written, OMC told their people to go home and not come back. That will cause their value plummet even further.
Many workers and their families have responded in the feedback section, our hearts and prayers go out to them, especially in this Christmas season.
When might something happen?
The current shutdown makes action imminent. The basic problems have been around and while, and an exit strategy plan has surely been constructed by now. If acquisition is selected, contacts will be made with potential candidates (or they will make contact with OMC), general discussions will result in potential negotiations. This particular season frees up many execs allowing meetings to rapidly progress in comparison to other times of the year. An announcement by year end may be forthcoming, but it could be longer. If few bidders show up, potential buyers may wait them out for an even lower price.
Who visits with the sharks?
OMC has retained the firm of Houlihan, Lokey, Howard & Zukin to explore strategic alternatives.
What might happen?
The value of the OMC "names", existing goodwill, Intellectual Property and the dealership organization suggests disposing of the boat companies (requiring them to purchase drives from OMC, if possible) may be a way of streamlining OMC and raising a considerable amount of cash. Most Japanese drive companies also make boats in Japan. It costs too much to ship the hulls to the U.S. One may be interested in obtaining some quality U.S. builders. OMC already has a relationship with Suzuki (purchases some four-stokes from them). The question is, will the streamlining be done by OMC or the next player?
Jacobs (Genmar) has invested too much money in VEC hull forming technology to want the OMC builders. He might buy OMC for the drive side (vertical integration) and just close the builders (eliminate competition) or reuse their brand names?
Others could enter in some form of dual acquisition (one player gets the drive side and one player gets the boat companies). It is very difficult to get even "one" potential buyer through all the negotiations required to close a deal like this. Chances of moving two through at once are minimal. Especially considering the level of animosity between many of the industry players and personalities plus the effect of trying to work in a clause forcing the new boat group owner to buy drives from the new drive group owner. Some sort of stepped acquisition might occur, where one firm buys both groups and quickly sells one group to another firm.
As time wears on, a major break up into component business (drive company one way and individual boat companies different ways) seems more likely.
Plus there is always the wildcard of David Jones. Yes, I know he is no longer there, but I was in the Hilton Towers in Chicago when Greenway brought him out from behind the curtain and all the jaws dropped. It can happen again with another backer. Some may say he has tried once to turn them around, but that was within the constraints and goals of Greenway. Under another player, another time and another set of goals he might be successful. He has already gone from Mercury to U.S. Marine to Mercury to OMC to limbo. Don't count him out yet.
Until next time!
Please tell Mr. Wizard if you liked his comments, if you think he's out to lunch, or any comments you may have. Send your comments to email@example.com. We will remove your name and any company affiliation information before we post them.