Malibu seeks to expand reach of Cobalt Boats

Malibu Boat’s purchase of Cobalt Boats was purchase of a company that offers several opportunities.
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Cobalt Boats was an attractive acquisition for Malibu Boats, in part, because of the company’s entry into the outboard segment. Show here is Cobalt’s outboard-powered 25SC.

Cobalt Boats was an attractive acquisition for Malibu Boats, in part, because of the company’s entry into the outboard segment. Show here is Cobalt’s outboard-powered 25SC.

Malibu Boat’s purchase of Cobalt Boats was “not an acquisition of a sterndrive company,” but the purchase of a company that offers several opportunities given Cobalt’s entry into the outboard and wake surf segments last year.

That’s according to Malibu CEO Jack Springer, who emphasized the potential in the outboard segment during a conference call with investors and analysts this morning following Wednesday afternoon’s announcement that Malibu has entered “a definitive agreement” to purchase privately-owned Cobalt for $130 million.

The outboard market, which Cobalt entered into last year, has been the largest-growing segment in the industry, Springer said.

“We see significant opportunity to expand the brand’s reach,” Springer said, adding that he thinks that can be grown by developing new product. “The outboard segment represents a big whitespace area.”

“That’s really what has made this so compelling for us and why I made the statement that I did,” Springer told Trade Only Today in an interview following the call.

“Cobalt has some real opportunities for us,” Springer told Trade Only. “Some leaders have gotten into the outboard segment — Sea Ray, Formula to some extent, Chaparral to some extent — and Cobalt came in behind. They’re in the process of making up ground and we believe we can make up that ground faster.”

Malibu can also help Cobalt further develop its wake surf models introduced last year, Springer said. “If we do it correctly, we’re going to own surf in sterndrive and towboats,” he said.

Springer stressed that there’s not going to be “a lot of trading back and forth” among dealers. “They have a phenomenal distribution and dealer network,” he said. “They have No. 1 and No. 2 market share in 70 percent of their markets. The opportunities that will arise will be in dealers on both sides that might be No. 3 or No. 4 in market share. Or if a Cobalt dealer carries a competitor … we are looking at this in a very bifurcated fashion — what dealer’s best for Cobalt? What dealer’s best for MasterCraft?”

For example, if a Cobalt dealer is No. 1 in a given market, but a Malibu dealer was, for whatever reason, No. 4 or No. 5 and had not demonstrated the ability to get better, not taking advantage of training programs Malibu offers, “that might be a situation where we’d say, well, who is the best dealer?” Springer said. “Similar to what we do today. Logically that Cobalt dealer would be someone we have more interest in, and vice versa.”

Springer sees opportunities in Europe growing for both companies. “When you combine a brand like Malibu and Cobalt and put that in Europe, it’s going to automatically have much better genre of product to attract dealers with,” he said.

Right now, Malibu shares about a third of the European market with MasterCraft and Nautique, Springer said. “But I think for both parties, you don’t always necessarily have the opportunity to get the best dealer in a country, but with the combined product, that will give us an advantage.”

Cobalt Boats is a market leader in the sterndrive segment as the only company that has not seen declines like other sterndrive markers, Springer emphasized during the call.

“The sterndrive business has, as we all know, over time decreased,” Springer said. “Cobalt is uniquely situated there. They have an extremely loyal client base, and we think can grow that base. They are market share leader.”

Malibu can help Cobalt grow that base in its newly-entered segments, Springer said.

“I would love to increase the velocity of new products to market,” he said.

In the last five years, Malibu has looked at acquiring almost two dozen companies, but has been very selective, Springer said.

Following the completion of the transaction, Malibu, with its headquarters in Loudon, Tenn., will maintain operations in Neodesha, Kansas, Cobalt’s headquarters, Springer told Trade Only. “We plan to keep [manufacturing operations] there,” he said. “They are very different boats; we’ve built out our plans to accommodate Malibu and Axis. We foresee for the long future a scenario where Cobalt will continue to build sterndrive and forward- drive boats and operationally continue to do what they’re doing.”

Cobalt CEO Paxson St. Clair will continue to lead the Cobalt business as its president and he will become a director on Malibu’s board after the transaction is completed.

The agreement to buy Cobalt is subject to adjustment for any settlement or judgement in connection with pending patent litigation between Cobalt and Sea Ray Boats, which is owned by Brunswick Corp.

Malibu, who has won several patent litigation suits regarding its wake surf technology, will be interested in the outcome of that litigation.

“I think we’ve proven we know [intellectual property], we’ve proven we’ll do whatever it takes to prove our position in IP, and ultimately, I think it just strengthens their position,” Springer told Trade Only.

Cobalt Boats, founded in 1968, manufactures mid- to large-sized sterndrive boats, and recently expanded into the surf and outboard markets. The transaction is expected to close in early July, subject to customary closing conditions.

The combined business is anticipated to deliver approximately $7.5 million in synergies and operational improvements, expected to be realized by the fourth year post-closing, and approximately $18 million in expected tax benefits.

For the last 12 months that ended March 31, Cobalt generated approximately $140 million in net sales. The company sells its 24 models through a dealer network of 132 locations in the United States, Canada, and overseas.

“This is an outstanding opportunity for Cobalt, our employees, and our dealer network,” St. Clair said in a statement. “As our focus has always been on the long-term success of the company, Malibu brings us a new level of opportunity through accelerated growth and brand awareness. I look forward to working with the Malibu team and continuing our legacy of market leadership.”

The transaction is expected to be accretive to Malibu’s earnings per share in fiscal year 2018, excluding purchase accounting adjustments and acquisition costs. In connection with the transaction, Malibu expects to benefit from tax attributes valued on a present value basis at approximately $18 million.

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