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Brunswick estimates up to $40 million loss in Sea Ray sale

Brunswick outlined its anticipated losses on the sale of Sea Ray in an SEC filing this week and responded to a letter from an asset management firm requesting it spin off its fitness business.

Brunswick outlined its anticipated losses on the sale of Sea Ray in an SEC filing this week and responded to a letter from an asset management firm requesting it spin off its fitness business.

Brunswick Corp. expects to incur a loss between $35 million and $40 million in the sale of its Sea Ray brand.

The company said when it announced its decision on Dec. 5 to sell Sea Ray, once the cornerstone of its marine business, that it would incur a loss, but that it did not know at the time what it would be.

In a filing with the U.S. Security Exchange Commission on Monday, Brunswick said the loss was related primarily to “a write-down of long-lived assets,” which will be reflected in the fourth quarter and full-year 2017 results that Brunswick will release on Thursday.

The charge is an estimate of the difference between the net book and fair value of the brand, according to the SEC filing.

Before the open of Tuesday’s stock market, Owl Creek Asset Management issued a letter calling for Brunswick’s board of directors to approve a “spin-off” of its fitness division.

Owl Creek Asset Management advises investment funds that own 2.5 million Brunswick shares, or approximately 2.8 percent of the company’s outstanding common equity.

“Despite having a higher quality business with better growth prospects than almost all of its peers, Brunswick is valued at a significant discount,” wrote Jeffrey Altman, managing partner at Owl Creek.

“We believe that now is an excellent time to execute on this transaction, as continuing to delay it only slows the process of reducing the conglomerate discount, and increases the risk of operational missteps,” said Altman in the letter. “The marine trends are strong, and we believe will continue to be strong for the foreseeable future as boat sales remain well below scrappage rate.”

In addition, the tax plan should help accelerate economic growth and boat demand, Altman wrote.

“Now is the time to capitalize on these favorable trends and cyclical tailwinds for the benefit of shareholders,” he wrote. “Furthermore, the longer these businesses remain together, the greater the chance is that the company’s overall execution is less than optimal, which directly harms all stakeholders in the business.”

Owl Creek estimates that more than 50 percent of marine earnings before tax, depreciation and amortization is derived from the manufacturing and distribution of parts and accessories, “which is a high-quality revenue and earnings stream with significant pricing power and relatively low cyclical exposure,” Altman wrote.

Spinning off fitness and disclosing more details among marine segments would “showcase this aftermarket business” and significantly improve Brunswick’s valuation, Altman said.

Brunswick CEO Mark Schwabero issued a statement Tuesday responding to the letter, saying that the company is “always open to constructive input from our shareholders” and that Brunswick appreciates the ongoing dialogue it has had with Owl Creek over the last several weeks.

"Our board has a proven track record of driving strong operating performance and taking decisive actions with respect to our portfolio as part of our commitment to delivering shareholder value,” Schwabero said.

Owl Creek has also been discussing the operating performance in the boat manufacturing segment, Altman said in the letter.

“While we agree with the decision to sell Sea Ray, the boat manufacturing margins remain below peers and should be an area of continued focus by management and the board,” Altman wrote.

Brunswick lost about $13 million on Sea Ray during the first nine months of 2017, according to the filing. Company CFO Bill Metzger confirmed to analysts during a conference call after the Dec. 6 announcement that Sea Ray was operating at a loss and implied that it had been doing so at least through much of fiscal 2017.

“Per management's previous commentary that Sea Ray would generate around $380 million in 2017 revenue, it would imply that revenue for that brand fell 6 percent year-over-year during the calendar year,” wrote SunTrust analyst Michael Swartz in a report following the 8-K filing.

That means the company expects double-digit growth in its other boat brands, Swartz wrote.

Brunswick will classify Sea Ray as discontinued operations when it reports fourth-quarter earnings on Thursday.


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