BLACK DIAMOND INC BDE
July 27, 2015 - 10:16am EST by
mojoris
2015 2016
Price: 10.00 EPS 0 0
Shares Out. (in M): 33 P/E 0 0
Market Cap (in M): 330 P/FCF 0 0
Net Debt (in M): -20 EBIT 0 0
TEV: 310 TEV/EBIT 0 0

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  • M&A (Mergers & Acquisitions)
  • NOLs
  • M&A Process
  • Management Change
 

Description

 

Situation Overview:

 

I will keep this write up short (although this a long opportunity)…

 

Black Diamond, [ticker, BDE], is not an under-valued security using traditional value screens.

 

BDE does not look statistically cheap.

 

BDE does not trade at an unchallenging valuation using metrics like price earnings or free cash flow.

 

BDE is not widely covered by the sell-side community (Bloomberg: 3 buys; 5 holds; 2 sells).

 

BDE does not have a great balance sheet, if you ignore the Net Operating Loss – as there is really one way to utilize it.

 

That said, BDE could be in the final chapter of its existence as stand-alone public company. I normally don’t transact in sub $500mm equity values with limited trading volume. However, BDE is in the late innings of its strategic alternatives process. The various alternatives include:

 

  • Sale of the company in a single transaction

  • Sale of the company in 2 transactions, whereby, the NOL will be maximized

  • Sale of one asset, retain one business plus NOL

  • No sale, standalone business plan (no narrative has been disclosed to my knowledge)

 

For purposes of this write-up, I will focus on the binary deal or no deal.

 

Event Path:

 

On March 16, 2015, Black Diamond, announced they engaged financial advisors, Rothschild and Robert W. Baird to explore strategic alternatives for the company. http://www.blackdiamond-inc.com/phoenix.zhtml?c=118683&p=irol-newsArticle&ID=2026085

 

Key passage:

 

“Warren Kanders, executive chairman of Black Diamond, commented: "Over the last 15 months, we have undertaken a series of actions to leverage the significant growth in our brands, optimize our platform, drive significant cost reductions, and position the Company for stronger financial and brand performance. We believe the growth in sales and margin in the fourth quarter is an early indication of the benefits of these actions, which we expect to realize increasingly over time.

 

"At a time when premium active lifestyle and outdoor brands are selling at historically high levels, and there is a scarcity of authentic branded assets available to strategic acquirers, the board's decision to investigate its strategic alternatives results from its belief that the Company is likely to utilize 100% of its NOL balances in connection with this process and represents the logical next step in our ongoing efforts to unlock value for Black Diamond shareholders."

 

Four months have passed since the announcement, and an announcement should be forthcoming in the next 0-60 days.

 

On May 29 and June 3, the BDE board of directors terminated members Metcalf and in-coming ceo, Zeena Freeman (technically they resigned, but were allowed to keep their incentive grants upon a change of control).

 

Lastly, BDE, has yet to file a proxy statement and hold an annual general meeting, and is now in violation of Delaware law. Reading the tea leaves, the next vote the company will hold will for the sale of the company and/or monetization of key business or financial assets.

 

Link to Delaware law: http://delcode.delaware.gov/title8/c001/sc07/

 

Business Snapshot:

 

http://www.blackdiamond-inc.com/phoenix.zhtml?c=118683&p=irol-brands

 

I will allow various excerpts from the transcript speak for themselves:

 

“The Gregory sale monetized approximately $48.3 million of our NOL balance, shielding approximately $16.9 million of cash taxes, leaving an NOL balance of approximately $167 million.”

 

“We anticipate sales of approximately $208 million which would represent an increase of 8% from our 2014 sales, an increase of 11% on a constant currency basis. On a constant currency basis, we are forecasting consolidated gross margins for fiscal 2015 to be approximately 40%.”

 

“I would like to conclude my remarks by commenting on our March 16 announcement that Black Diamond engaged the financial advisory firms Rothschild Inc. and Robert W. Baird and Company to lead the exploration of a full range of strategic alternatives including the sale of the company's Black Diamond equipment including PIEPS and POC brands in two separate transactions. The company has received a number of non-binding indications of interest with respect to each of these brands. We anticipate that the results of the strategic review process will be known during the third quarter 2015 and we do not intend to comment further regarding this strategic review process unless or until a specific transaction is approved by our Board of Directors or shareholders, the strategic review process is concluded or it is otherwise determined that further disclosure is appropriate or required by law.”

 

Valuation Snapshot / Key metrics:

 

Cash      $41

 

Debt      $22

 

Real Estate Value $10 (conservative est)

 

Shares Outstanding ~33mm

 

Current Price $10

 

Enterprise Value $321

 

Net Operating Loss $167mm*

 

*NOL disclosure:

 

“The Company estimates that it has available NOL carryforwards for U.S. federal income tax purposes of approximately $167 million. The Company's common stock is subject to a rights agreement dated February 7, 2008 that is intended to limit the number of 5% or more owners and therefore reduce the risk of a possible change of ownership under Section 382 of the Code. Any such change of ownership under these rules would limit or eliminate the ability of the Company to use its existing NOLs for federal income tax purposes. However, there is no guaranty that the rights agreement will achieve the objective of preserving the value of the NOLs.”

 

Snapshot Valuation in the event the process results in a sale (low end):

 

Clearly there is a range of values, but looking at precedent transaction multiples, including the sale of Gregory for ~$85mm to Samsonite, we believe BDE is worth $10.50 - $13.50 or 5%-35% higher than current trading levels.

 

BDE has two businesses. The Black Diamond / PIEPS business and POC. Using round numbers BD generates revenues of ~165mm for 2015 and POC ~45mm or $210 in total sales.

 

If sold (using 2015 revenue estimates), we believe BD will be sold for 2.0x sales or ~$330mm.

 

POC is growing faster, and more desirable business to buyers. 2.5x, using midpoint = ~$112mm

 

Total price of $390mm + Cash + RE – debt = ~$442mm

 

Due to the taxable nature of a transaction that may/may not transpire, we believe the deal will be structured as an asset sale and would remove all tax burdens from holders.

 

High End:

 

Sale Price ~$442

 

Cost basis ~$142

 

Gain on sale $300

 

NOL ~$165

 

Taxable Income 135

 

After tax proceeds ~ $442mm

 

Estimated shares outstanding: ~33mm

 

= $13.39 / share

 

Low End (BD at 1.5x, POC at 2.25x):

 

Sale Price~ $349

 

Estimated shares outstanding: 33mm

 

= ~$10.56 / share

 

Recently, sell-side firm, Canaccord, came out with a valuation range of $14 - $17. Based on our checks, that valuation range seems aggressive…but it’s better to be lucky than smart – we’ll take it.

 

Downside:

 

The stand-alone plan is not straight forward, as management does not consistently engage with the sell-side or buy-side community. Prior to the alternatives announcement, the shares were trading in a range of $6.50 - $8. Some of these moves may have been due to (il)liquidity, tax loss-selling, etc so the unaffected price should be $7+-. A stand-alone Plan B, with normalized margins on a $200mm+ run rate = earning power is closer to 50-75c/share (excluding new stock grants to incentivize new CEO). At a break price of $7/share with $60c in cash; NPV of NOL of $1+Value + real estate value / HQ 30c = $5/share or 7-10x earnings. The shares probably trade down to $7 and recover to $8-$8.75 over time.

 

Probabilities:

 

Break: $7, assume no recovery (10%)

 

Dispose of 1 asset: $9 (15%)

 

Sale + monetize NOL: $12 (75%)

 

Probability adjusted price: $11.05 / 10.5% spread

 

Summary:

 

Common holders are aligned with top management and the remaining board members. The in-coming CEO was terminated during the strategic alternatives process, and was allowed to retain her change of control payments. The company has not filed a proxy and is in possible breach of Delaware law. It is unlikely the strategic alternatives process is not concluded before September 30, 2015. BDE will report earnings on August 11. I would expect an announcement to come either on that report or shortly there-after.

 

Risks:

 

No deal / no plan B articulated publicly

 

Event fatigue

 

Liquidity – event-driven holders hit eject

 

Normalized earnings power has very wide range

 

Listing requirements: must hold annual meeting

 

Unable to monetize net operating loss via asset disposal or on go forwards basis

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Sale of the company

Monetization of NOL

    sort by   Expand   New

    Description

     

    Situation Overview:

     

    I will keep this write up short (although this a long opportunity)…

     

    Black Diamond, [ticker, BDE], is not an under-valued security using traditional value screens.

     

    BDE does not look statistically cheap.

     

    BDE does not trade at an unchallenging valuation using metrics like price earnings or free cash flow.

     

    BDE is not widely covered by the sell-side community (Bloomberg: 3 buys; 5 holds; 2 sells).

     

    BDE does not have a great balance sheet, if you ignore the Net Operating Loss – as there is really one way to utilize it.

     

    That said, BDE could be in the final chapter of its existence as stand-alone public company. I normally don’t transact in sub $500mm equity values with limited trading volume. However, BDE is in the late innings of its strategic alternatives process. The various alternatives include:

     

     

    For purposes of this write-up, I will focus on the binary deal or no deal.

     

    Event Path:

     

    On March 16, 2015, Black Diamond, announced they engaged financial advisors, Rothschild and Robert W. Baird to explore strategic alternatives for the company. http://www.blackdiamond-inc.com/phoenix.zhtml?c=118683&p=irol-newsArticle&ID=2026085

     

    Key passage:

     

    “Warren Kanders, executive chairman of Black Diamond, commented: "Over the last 15 months, we have undertaken a series of actions to leverage the significant growth in our brands, optimize our platform, drive significant cost reductions, and position the Company for stronger financial and brand performance. We believe the growth in sales and margin in the fourth quarter is an early indication of the benefits of these actions, which we expect to realize increasingly over time.

     

    "At a time when premium active lifestyle and outdoor brands are selling at historically high levels, and there is a scarcity of authentic branded assets available to strategic acquirers, the board's decision to investigate its strategic alternatives results from its belief that the Company is likely to utilize 100% of its NOL balances in connection with this process and represents the logical next step in our ongoing efforts to unlock value for Black Diamond shareholders."

     

    Four months have passed since the announcement, and an announcement should be forthcoming in the next 0-60 days.

     

    On May 29 and June 3, the BDE board of directors terminated members Metcalf and in-coming ceo, Zeena Freeman (technically they resigned, but were allowed to keep their incentive grants upon a change of control).

     

    Lastly, BDE, has yet to file a proxy statement and hold an annual general meeting, and is now in violation of Delaware law. Reading the tea leaves, the next vote the company will hold will for the sale of the company and/or monetization of key business or financial assets.

     

    Link to Delaware law: http://delcode.delaware.gov/title8/c001/sc07/

     

    Business Snapshot:

     

    http://www.blackdiamond-inc.com/phoenix.zhtml?c=118683&p=irol-brands

     

    I will allow various excerpts from the transcript speak for themselves:

     

    “The Gregory sale monetized approximately $48.3 million of our NOL balance, shielding approximately $16.9 million of cash taxes, leaving an NOL balance of approximately $167 million.”

     

    “We anticipate sales of approximately $208 million which would represent an increase of 8% from our 2014 sales, an increase of 11% on a constant currency basis. On a constant currency basis, we are forecasting consolidated gross margins for fiscal 2015 to be approximately 40%.”

     

    “I would like to conclude my remarks by commenting on our March 16 announcement that Black Diamond engaged the financial advisory firms Rothschild Inc. and Robert W. Baird and Company to lead the exploration of a full range of strategic alternatives including the sale of the company's Black Diamond equipment including PIEPS and POC brands in two separate transactions. The company has received a number of non-binding indications of interest with respect to each of these brands. We anticipate that the results of the strategic review process will be known during the third quarter 2015 and we do not intend to comment further regarding this strategic review process unless or until a specific transaction is approved by our Board of Directors or shareholders, the strategic review process is concluded or it is otherwise determined that further disclosure is appropriate or required by law.”

     

    Valuation Snapshot / Key metrics:

     

    Cash      $41

     

    Debt      $22

     

    Real Estate Value $10 (conservative est)

     

    Shares Outstanding ~33mm

     

    Current Price $10

     

    Enterprise Value $321

     

    Net Operating Loss $167mm*

     

    *NOL disclosure:

     

    “The Company estimates that it has available NOL carryforwards for U.S. federal income tax purposes of approximately $167 million. The Company's common stock is subject to a rights agreement dated February 7, 2008 that is intended to limit the number of 5% or more owners and therefore reduce the risk of a possible change of ownership under Section 382 of the Code. Any such change of ownership under these rules would limit or eliminate the ability of the Company to use its existing NOLs for federal income tax purposes. However, there is no guaranty that the rights agreement will achieve the objective of preserving the value of the NOLs.”

     

    Snapshot Valuation in the event the process results in a sale (low end):

     

    Clearly there is a range of values, but looking at precedent transaction multiples, including the sale of Gregory for ~$85mm to Samsonite, we believe BDE is worth $10.50 - $13.50 or 5%-35% higher than current trading levels.

     

    BDE has two businesses. The Black Diamond / PIEPS business and POC. Using round numbers BD generates revenues of ~165mm for 2015 and POC ~45mm or $210 in total sales.

     

    If sold (using 2015 revenue estimates), we believe BD will be sold for 2.0x sales or ~$330mm.

     

    POC is growing faster, and more desirable business to buyers. 2.5x, using midpoint = ~$112mm

     

    Total price of $390mm + Cash + RE – debt = ~$442mm

     

    Due to the taxable nature of a transaction that may/may not transpire, we believe the deal will be structured as an asset sale and would remove all tax burdens from holders.

     

    High End:

     

    Sale Price ~$442

     

    Cost basis ~$142

     

    Gain on sale $300

     

    NOL ~$165

     

    Taxable Income 135

     

    After tax proceeds ~ $442mm

     

    Estimated shares outstanding: ~33mm

     

    = $13.39 / share

     

    Low End (BD at 1.5x, POC at 2.25x):

     

    Sale Price~ $349

     

    Estimated shares outstanding: 33mm

     

    = ~$10.56 / share

     

    Recently, sell-side firm, Canaccord, came out with a valuation range of $14 - $17. Based on our checks, that valuation range seems aggressive…but it’s better to be lucky than smart – we’ll take it.

     

    Downside:

     

    The stand-alone plan is not straight forward, as management does not consistently engage with the sell-side or buy-side community. Prior to the alternatives announcement, the shares were trading in a range of $6.50 - $8. Some of these moves may have been due to (il)liquidity, tax loss-selling, etc so the unaffected price should be $7+-. A stand-alone Plan B, with normalized margins on a $200mm+ run rate = earning power is closer to 50-75c/share (excluding new stock grants to incentivize new CEO). At a break price of $7/share with $60c in cash; NPV of NOL of $1+Value + real estate value / HQ 30c = $5/share or 7-10x earnings. The shares probably trade down to $7 and recover to $8-$8.75 over time.

     

    Probabilities:

     

    Break: $7, assume no recovery (10%)

     

    Dispose of 1 asset: $9 (15%)

     

    Sale + monetize NOL: $12 (75%)

     

    Probability adjusted price: $11.05 / 10.5% spread

     

    Summary:

     

    Common holders are aligned with top management and the remaining board members. The in-coming CEO was terminated during the strategic alternatives process, and was allowed to retain her change of control payments. The company has not filed a proxy and is in possible breach of Delaware law. It is unlikely the strategic alternatives process is not concluded before September 30, 2015. BDE will report earnings on August 11. I would expect an announcement to come either on that report or shortly there-after.

     

    Risks:

     

    No deal / no plan B articulated publicly

     

    Event fatigue

     

    Liquidity – event-driven holders hit eject

     

    Normalized earnings power has very wide range

     

    Listing requirements: must hold annual meeting

     

    Unable to monetize net operating loss via asset disposal or on go forwards basis

     

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Sale of the company

    Monetization of NOL

    Messages


    SubjectBDE sale
    Entry07/27/2015 12:45 PM
    Memberrepetek827

    Thanks for the write up. What ever happened with buying padagonia and merging it into BDE? What will Warren Kanders do? He has been teh driver here the whole time and I am surprised you didnt mention him at all. 


    SubjectWhat to do now? Update?
    Entry10/09/2015 10:16 AM
    Memberrepetek827

    Mojoris,

    I see that they sold one division and closed the deal yesterday.

    https://finance.yahoo.com/news/black-diamond-completes-sale-poc-093000145.html

    According to them,  "Black Diamond expects to realize net proceeds of approximately $60.0 million after purchase price adjustments, fees, expenses and taxes. Post-transaction, the Company expects to have approximately $100.0 million in cash, $22.6 million in debt and around $167.0 million in net operating loss carryforwards."

    Q: With a market cap here of $180 mm and an EV of $100 mm and NOLs of $167 mm and a business that is generating cash, is this a screaming buy?

    Q1: What should we be worried about besides the tax loss selling of hedge funds and mutual funds in the next few weeks?

    Q2: What is Warren likely to do? 

    Q3: Where is the bottom valuation wise? 

    Thanks!

     


    SubjectRe: What to do now? Update?
    Entry10/09/2015 01:00 PM
    Memberstraw1023

    repetek,

    Can you share how you are getting "business that is generating cash" numbers? I am new to story, and I do not see any segment numbers, and I do not know how much overhead goes away with sale (but I guess that sale hurts overhead spreading), but ballpark, I am getting flattish EBITA post sale -- after adding back restructuring and amortization of intangibles. Capex seems fairly in line with Depreciation so not much cash there.

    This seems like a case of a business that runs flat as a standalone but worth a fair amount to an acquirer.

    thanks

     

     

     


    SubjectRe: Re: What to do now? Update?
    Entry10/14/2015 03:43 PM
    Memberrepetek827

    Hi. So sorry for the delayed response. Yes I may have misspoke. I dont have detailed segment data either and since I didn't play this name here - but am still interested - I haven't done a deep dive. I met them years ago when they had some wall street lunches as they came "public" and was familiar with Warren from his previous escapades in some names. A couple smart people I know who know Warren are still involved. I liked the story and thought there was potential but didn't see a clear path forward. 

    Clearly, its an asset value story here though with the strong balance sheet PF the deal, the NOLs and the stock at a multi-year low on the traders getting out post the dissapointing non-deal and the tax loss selling in October. Insiders bought at high 6's and 7's a few years ago and that was before the recent sale of the business. So it seems low..

    But this line from their latest PR scares the heck out of anyone, me included. 

    "Black Diamond plans to maximize shareholder value by focusing its attention on the profitability of both the Black Diamond Equipment and PIEPS brands while redeploying the proceeds of the sale to potentially unrelated and diversifying investments. The Company will provide a full strategic and financial update on its third quarter earnings call in early November 2015."

    Any ideas out there with where a low is? Or what they will do now? 


    SubjectBDE - Completely New Chapter (Detailed Write-up)
    Entry11/18/2015 01:38 PM
    Memberabalone657

    Black Diamond, Inc. (BDE - $4.15) 

     

    I was just accepted to VIC on this application write-up, but since the name was recently posted to VIC I could not post it as a new idea.  Since the mojoris write-up on 7/27/15 BDE has dramaticly changed form.  On 11/9/15 it essentially converted from a soon to be completed liquidation play to an NOL rich blank check Company.  The Company conference call from that day is an excellent (and only 20 minute) recap of the releveant history an current situation.  Below is my take: 

     

    Black Diamond, Inc. (“BDE”) is a distressed special situation stock trading at the low end of a wide potential valuation range, and it’s laced with pending and potential catalysts.  The stock is down from $10+ in August 2015 to its current $4 thanks to a string of disappointments; a sudden, messy and dramatic strategy shift from a liquidation to an acquisition plan (announced 11/9/15), and a shareholder base that’s totally fed up and exhausted.

     

    On the surface what you have today is a $130mm market cap holding company (BDE) which possesses a $150mm (revenue) iconic brand, Black Diamond Equipment (“BD”), approximately $75mm in net cash and Federal NOLs of approximately $130mm (post POC sale).  D.A. Davidson issued an updated analyst report on 11/10/15 with a 12-18 month price target of $7/share: they value BD at 1x revenue or $5 per BDE share plus the roughly $2 in net cash per share.  The current market price values BD at less than 0.5x revenue or about $50mm.  NOTE: BD has a special heritage.  In 1989 Chouinard Equipment dissolved…Black Diamond Equipment was formed to absorb its climbing equipment business, and the world famous Patagonia was formed to absorb its budding apparel business.  BD is a very authentic and “cool” brand with a very loyal following: www.blackdiamondequipment.com

     

    Digging deeper, the story gets a lot more interesting.  Insiders led by well-known deal-maker Warren Kanders own over 30% of BDE.  On 11/9/15 the Company increased a previously unused share buy-back program to $30mm.  At the same time the Company announced that rather than sell their BD subsidiary and complete a liquidation of BDE (which was anticipated to garner $10+ per share), they would instead keep BD and utilize cash on hand (including liquidation proceeds from their 10/2015 POC subsidiary sale) plus readily available financing to go whale hunting (with the help of investment bank Rothschild) for “high quality, durable cash flow producing assets with enterprise values in the range of between $250mm-$500mm.”  (They noted they would search outside the outdoor sector implying a “generalist” strategy).  This means BDE is now essentially a private equity enterprise with a highly successful and motivated team (Kanders and Schiller), no promote or performance fees and $130mm NOLs.  The market appears to be completely ignoring the potential value of this PE enterprise and its prospects. 

     

    Who is Warren Kanders?

     

    Warren Kanders is a well-regarded value investor and deal maker.  His flagship deal was acquiring Armor Holdings in 1996 and building it through acquisition until he sold it to BAE Systems for $4.1 billion in 2007 netting him $300mm personally.  One of Kanders’s partners at Armor Holding was BDE Executive Vice Chairman, Robert Schiller.  Kanders and Schiller own 7.8mm (23.3%) and 1.5mm (4.8%) respectively of BDE.  Both have impressive resumes.  And since reforming and taking control of BDE in 2010, they have completed two successful deals on behalf of BDE.  They acquired Gregory Backpacks in 2010 for $44.1mm and sold it in July 2014 for $84.1mm.  And they bought POC in July 2012 for $44.9mm and sold it in October 2015 for $64.6mm. 

     

    What’s the BD brand worth? 

    I’m not sure, but it seems very cheap right now.  As mentioned, the BDE stock price implies a $50mm BD value or well under 0.5x sales.  D.A. Davidson says 1.0x sales (or about $150mm).  When BDE announced it’s plans to explore strategic alternatives in March 2015, Kanders stated as a reason the Company’s belief that “the Company is likely to utilize 100% of its NOL balances in connection with this process…”  So it’s easy to infer that the Company had reason to believe BD was worth well over 1.0x sales.  BDE bought BD in 2010 for $90mm in cash.  After the POC sale, BDE has approximately $130mm in Federal NOLS…so in order to use 100% of those NOLs a BD sale would need to be made at $90mm + $130mm = $220mm.  Here’s another way to slice BD.  The $50mm BD value includes PIEPs which was acquired in 2012 for about $15mm.  If PIEPs has held its $15mm value, the Black Diamond brand is trading at $35mm.  If PIEPs has doubled like Gregory and POC did (I have no insight at all here, just speculating) then the PIEPs part of BD is worth $30mm and the Black Diamond brand is trading at $20mm.  Again, I don’t know, but a $75mm-$150mm value seems reasonable.

    What happened with the BD sale?

     

    On the 11/9/15 conference call Kanders, in addressing the liquidation/sale process said, “After a robust 7-month global process that included 225 parties contacted and 90 confidential memorandums distributed, in October 2015, we closed the sale of POC… This brings us to the present. We believe that Black Diamond Equipment has far more intrinsic value than our strategic process conveyed. During the process, Black Diamond Equipment was burdened with redundant operating platform costs historically in place to support POC, Gregory and future development. We have already began to right size and to reform Black Diamond Equipment towards historical and industry commensurate levels of profitability.”  Keep in mind that BDE’s initial business plan had been to be a roll-up platform in the outdoor space.  I think it’s possible that BD’s numbers were too muddied up by the larger roll-up infrastructure and therefore impeded the sale of BD at a good enough price.  I think it’s possible that BDE does eventually sell BD once it has been cleaned up. 

    Potential catalysts:

    1.     I think it’s highly possible that we see reports of insider buying at these levels

    2.     I think it’s highly possible that we see reports of BDE buy-backs

    3.     Once the liquidation thesis investors have sold out and the NAV/PE thesis players have bought-in, I foresee a stock price settling in the middle of the $4-$7 range.

    4.      An acquisition announcement will cause the market to recalibrate the NAV/PE thesis into the model, and likely giving reason to add NOLs into the NAV (bring them from their current ignored state to a more tangible asset).

    5.     As mentioned above, I think a sale of BD is still possible (if not in the cards).  The new PE plan has no allegiance to the outdoor sector and they may see better use for BD’s value and equity.

    In conclusion: I think there’s good margin of safety at $4 and a reasonable high range in 12-months of $7+.

    Disclosure: I own BDE shares.  I may buy more, or I may sell all my shares.


    SubjectRe: Re: BDE - Completely New Chapter (Detailed Write-up)
    Entry11/18/2015 06:06 PM
    Memberabalone657

    roc924: My understanding from a conversation with the Company is that the Black Diamond/PIEPs business is on track with their previous commentary...that we're looking at flat to single digit growth (formal guidance will be provided in "early 2016") - flat would be about $150mm in 2016.  So $150mm-$160mm.  There was no sentiment from them that ski boots or headlamps were not doing well - core business across all is fine (albeit apparel did not achieve the lofty goals initially set out, but it's being right-sized).  What BD is facing though is the same headwinds everyone is facing in Europe, Japan and Asia.  I think perhaps BD could be looking at $140mm in 2016 if these headwinds continue.

    Another consideration I missed in my earlier comment is that in the 11/9 conf. call the Company mentioned "inventory normalization should resolve in targeted reduction of $10mm in 2016."  This would add another $10mm to the net cash position of approximately $76.5mm.  So pro-forma net cash of $86.5mm.  I'm also trying to learn more about their "Property and Equipment" of $11.6mm which is marked at cost less depreciation to see if there is any significant upside there.  


    Subjectdoes this concern you or has it been resolved?
    Entry11/19/2015 10:10 AM
    Memberrhubarb

    from 2014 10-K

    "We have outstanding an aggregate of 32,704,171 shares of our common stock as of March 10, 2015. This includes 7,835,284 shares of common stock that are beneficially owned by Mr. Kanders, our Chairman of the Board, of which he has 5,647,367 hypothecated and/or pledged as security for loans from financial institutions, and that may be sold by such financial institutions in the event of a foreclosure of these loans."

     

     


    Subjectmore pushback
    Entry11/19/2015 11:30 AM
    Memberrhubarb

    Abalone, your write up seems compelling and inspired me to read the filings.  Please don't be offended as I attempt to poke a few holes in bull case. 

    While I agree the SOTP is very compelling, i have a few concerns. 

    First, is there a credible path for BDE to make any money?  It looks like they haven't turned an operating profit since 2012.  And they have burned cash in every year except 2013, and the cash burn has accelerated in the past year and a half.  Their losses/cash burn is now quite meaningful.

    They just sold their most desirable (and profitable) assets and will likely experience deleveraging over their fixed cost base.  Meanwhile, in the recent Q, remaining sales were down 10.9% (5.4% FX neutral) despite all the investments they've made in apparel.  Their categories seem quite competitive and the strong dollar is not helping. 

    Therefore, I have a hard time ascribing a lot of value to the NOLs as they expire in 2021 and 2022.  And I LOVE NOL monetization stories. 

    Also, I'm not sure that being along for the ride with Kanders is such a great thing.  The Kanders jockey bet has been the bull case for this stock for years - all the way down.  So while I do agree that he seems to be a savy dealmaker overall, the operations of BDE have been a disaster and we should ding him for that.  In addition, he has competing entities which have bought other businesses.  His most recent purchase, Mountain Khakies, is an outdoor brand that seemingly is in the same category as BDE.  If it was such a great deal why didn't BDE get to buy it?  Is Kanders now going to sell it to BDE?  Is he going to cherry pick the best deals he finds for his 100% owned structure (now that the new acquisition mandate seems to have broadened substantially)? 

    Do any of you share the above concerns?  Abalone657?  I understand much has been discounted in the price but i wanted to make sure I understand what I'm signing up for when deciding if and at what price to get involved.  Thanks in advance.

     

     


    SubjectRe: more pushback
    Entry11/19/2015 05:40 PM
    Memberabalone657

    Good push-back.  I like it and please keep em coming.  Here's my take:

    1.”Is there a credible path for BDE to make any money?”  A. The 11/9/15 conference call described BDE’s goal “to return the brand to its 2011 cost structure or roughly a 10% EBITDA margin run rate excluding corporate costs sometime during 2016.”  So, approximately $150mm in revenue x 10% = $15mm minus corporate costs.  B. Also, I believe 1.0x revenue is a reasonable valuation (separately so does D.A. Davidson)  and that a sale could still eventually occur.  So, $150mm x 1.0 = $150mm - $60mm (current BDE EV) = $90mm tax free profit.  Even say 0.75 revenue = $112.5mm - $60mm = $52.5mm in tax free profit. C. “…inventory normalization should resolve in a targeted reduction of $10mm in 2016” = $10mm added to the cash balance. D. BDE e-commerce is growing double digits globally – direct to consumer margins are double to triple wholesale margins.  It’s currently a relatively small percentage of sales but is yet another area I’m watching in regards to your question.

    2.”…they haven’t turned an operating profit since 2012.  And they burned cash in every year except 2013.”  BDE historically re-invested heavily to build a $500mm roll-up platform infrastructure and to also build-out a comprehensive apparel line negating profitability.  Both of these initiatives are basically being wound down “to return the brand to its 2011 cost structure or roughly a 10% EBITDA margin…”

    3.”Remaining sales were down 10.9%...” –if macro headwinds (Europe, Japan, Asia) persist I’m thinking 2016 revenue could be down single digits to say $140mm, otherwise I’m ok with BDE’s inference of flat to single digit growth so say $150mm to $160mm for 2016 (they will provide guidance in “early 2016”).

    4.”I have a hard time ascribing any value to the NOLs” – I don’t currently ascribe any value to them myself - I consider them freebies at this point.  I do know that Kanders has worked diligently since acquiring BDE (prev. Clarus) to monetize them.  His #1 stated mandate for BDE is monetize them.  He owns 24% of BDE.  And, as you mentioned, he’s only got five years to make it happen…I see the “short” time horizon as a plus myself.

    5.”I’m not sure that being along for the ride with Kanders is such a great thing.”  As you point out this is a “Kanders jockey bet.”  A bet on BDE is a bet on Kanders.  If you don’t want to bet on Kanders then you might not want to bet on BDE.  I certainly don’t have a crystal ball here, but rather, I’d say my glass is more “half full.”  I was not burned on BDE.  In fact, I made money in that I owned Clarus when the BD acquisition announcement was made.  I thought the BD strategy was a good one back then, but it didn’t work out.  But I recognize that BD is one of many dozens of deals Kanders has done in a very long career along with his partner and BDE Vice Chairman Schiller.  Collectively these guys own 30% of BDE.  Again, glass half full, I’m not concerned about them doing any self dealing.  I’m willing to bet that these smart guys who own 30% of the stock and have been trying to make it go up in value for many years are extremely dedicated to making this thing work.  I see his proprietary interaction in the market with his “competing businesses” as a plus…that he has his fingers on the pulse of the deal flow and markets.  No one bats 1000, and, so far, BDE has not been a winner, but overall Kanders & Co has a very enviable track record, which I choose to use over BDE performance alone.  (On a side note regarding Mountain Khakis: BDE was in liquidation mode at the time Kanders bought it; the BDE acquisition mode was just announced on 11/9/15).

    I suppose I am viewing this name and situation with historical BDE blinders on - I was not hurt by this latest chapter and stock decline.  I show up to this scene with “fresh eyes” and see this as a simple special situation value story.  $80mm in net cash + a business that I think is likely worth $150mm for an NAV of $230mm or $7/shr trading at $4!  It’s got Kanders at the helm with a levered PE mandate, tons of skin in the game, $130mm in NOLs, a $30mm buy-back in place and a recent insider purchase transaction (with the potential for more).  Ex-negative historical BDE sentiments this is an awesome stock in my experience.  I’m not looking for this thing to trade at a premium anytime soon, but I’ve seen similar situations that have.  Part of my bet here is that as more “fresh eyes” like mine arrive on the BDE scene, the more appreciation the future prospects and tangible merits will receive.  But all this is just my 2 cents which are usually fairly valued!!

    Last Note: I have a call into the Company to inquire about the status of Kanders’s stock being pledged and details around it if it still is.


    SubjectRe: Re: more pushback
    Entry11/19/2015 06:42 PM
    Memberrhubarb

    Ok thanks for detailed response.  I agree that on a static sum of the parts the stock is cheap.         The uncertainty is around how much cash BDE burns going forward and what kanders does with the cash.  


    SubjectRe: Re: more pushback
    Entry11/21/2015 12:28 AM
    Memberthrive25

    Funny how not being involved can provide a completely different perspective by framing the same information in two very different ways.  I agree with the value, and can see why a fresh set of eyes here can lead to the bullish thesis -- on the other hand, like Majic and Mojo, I've been burned by these guys...Chairman, CEO and CFO had given very different indications throughout the years on what the strategic plan was.  They've been all over the place, pretty aimlessly, not knowing what they should do...build in house, sell parts, sell all, now they are buyers? Kanders may be savvy, but won't be surprised if he ends up using BDE to line his own pockets at shareholders' expense. Tax loss.


    Subject12/11/15 Shareholder Meeting in NYC at 8am
    Entry12/01/2015 11:33 PM
    Memberabalone657

    Will anyone on this board be attending?  I'd love to hear Kanders's ideas for acquisitions.  How many, timing, how to find anything cheap enough.  I'd especially like to hear if his Safariland business can be ruled out.  The WSJ reported it seeks to go public in 2016.  Plus it would be great to hear a general report of what occurs in there.  I've requested to IR to webcast the event including Q&A.   


    SubjectRe: 12/11/15 Shareholder Meeting in NYC at 8am
    Entry12/11/2015 03:10 PM
    MemberMostly_Ugly

    Abalone, I ended up attending this morning's meeting.  My notes below...

    Shareholder meeting 12/11/15

    Relatively candid Q&A session, Q&A to be included in earnings calls going forward

     

    Acquisitions, reiterate view of search for high quality, durable, cash flow producing assets with good managements.

    • Explicitly this is not another run at their failed strategy, so not outdoor living.  Could be in some kind of adjacency (examples given were lighting or military supply - possible now with production in US) or completely unrelated (Kanders mentioned energy specifically- ??)

    • Size/number, didn't rule out multiple acquisitions but not interested in sub $50M businesses.

    • Process is just beginning, will take time to get oriented in early 2016, Rothschild identifying opps.

    • Leverage, want to acquire as big as possible, could get 4-5x EBITDA now and in a better high yield environment maybe up to 7x.

    • Advantages here?  Market pretty efficient, maybe slight edge in carve outs, "as M&A happens, some stuff gets kicked out the back door", ability to move quickly.  Vs PE, some managements prefer longer term buyer.  Cited Calpers example, tiring of PE fees, maybe some benefit to BDE.

    • They got questions about whether the NOL means they'll pay up.  Kanders: "paying up is always in the rear view mirror".  Paid up for POC in some people's view, and the optionality didn’t work out but were right inn underlying support for valuation.

    • Safariland is not an acquisition target

    • Recognizes challenge in stock sponsorship, street coverage.  Proxies trade at NAV less a discount, maybe can do better if a single acquisition is large enough.  Will likely do corporate name change at June AGM.

     

    Postmortem discussion, nothing really new.  Distribution difficulties, etc.  Thinks they bought POC well, high cash costs to support growth, so better to sell and focus on BD/Pieps.  When Samsonite bought Gregory they valued it off gross margin; tried to shop BD the same way.  So try to get the cost takeouts and demonstrate value this way.  

     

    BD/Pieps business: scaling back infrastructure, get to 10% EBITDA before corp costs of $4M in '16 plus restructuring charges.

    • Challenges include FX (won't have last year's hedging benefit), Europe, Japan (sales off 2/3 in 18 months).

    • Took out 25 positions in Salt Lake, downsizing in Europe, moving from Switzerland to Innsbrook Austria.  But "major" initiative to upgrade distribution in Japan.

    • Say they can hit the 10% target on lower revenue base, but that they are seeing constant currency growth right now.

    • Apparel - not going to abandon this, but stop the attempt to make it central/high growth, put focus back on hard goods and let apparel grow at a low, more natural cadence.  Inventories built up in advance of moving out of China, should reduce in '16

    • Have some tech & IP that could be used in other industries, and interested in ways to monetize that.  It could connect to whatever they acquire, also will look at licensing agreements or JVs.

    • BD could still eventually get sold

     

    Buybacks: actively chipping away at the $30M authorization.  Limited to 112K shares/day, no blocks available.  They are price sensitive, won't be buying at $6, they'd buy it all at $4.       

     

     


    SubjectRe: Re: 12/11/15 Shareholder Meeting in NYC at 8am
    Entry12/11/2015 05:55 PM
    Memberabalone657

    Thank you kindly for posting.  Sounds like we may see sub $150mm 2016 rev with BD/Pieps, but I'm not too concerned with it as performance there won't move the needle too much compared to a large acquisition.  Glad to hear they're buying back shares.


    SubjectRe: Black Diamond brand
    Entry03/04/2016 02:32 PM
    Memberabalone657

    No doubt BD is a strong brand.  I expect to see weakness and maybe some disappointment from the Europe and Asia economic and currency headwinds.  Plus it would be reasonable to see some bumpiness from the European headquarters move along with other BD reorganization efforts.  That said, I expect to when they give guidance we'll see $150mm for 2016 and that they'll reiterate their ability to avhieve a 10% EBITDA margin rate by the end of the year.  If they are able to accomplish this, I too believe BD will become a sellable asset, but I see that as more of a 2017 opportunity.  I also expect to see that they have been able to repurchase a decent amount of stock below $4.50 per share.  

    But to me BD is really a static piece of this pie...I view it almost as a "land held for sale" balance sheet item with a $150mm-$200mm price tag.  The real interesting aspect of this name is that it's a Kanders & Co private equity vehicle which substantial cash and borrowing capabilities and, of course, significant NOLs.  While this aspect make BDE a highly speculatively bet on the levered deal making prowess of Kanders, the upside (and downside) of high leverage make this venture a ton more exciting than it's rather mundane sum of the parts analytical profile.  Layer in some of the more amazing chapters in Kanders' acquisition history and I think you have an argument that BDE is a decent investment here.  It's a fee-free PE play where the manager has 25% skin in the game (along with 10+ years of fruitless sweat equity to recoup) and a bunch of NOLs to sweeten the pot.  Oh, and all at arguably a discount to current NAV!  


    SubjectRe: Recalls
    Entry05/13/2016 08:30 PM
    Memberabalone657

    I called the Company on this.  Only about a dozen items had been returned, so it wasn't a big direct hit, but roc924's comments speak an unfortunate ripple effect.


    SubjectAbalone657 - any update?
    Entry08/24/2016 12:20 PM
    Membershoobity

    Abalone, do you have any update here? Looks like they are continuing to see some pretty strong margin pressure as a result of bringing the manufacturing home to the US but have made progress on decreasing inventories and a little bit of right-sizing cost structure to the point where they don't plan to burn any cash this year. Has anything changed in your thesis here?

    Thanks.

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