A Bit More On The Newmar Winnebago Deal

More on the Winnebago acquisition of Newmar? Yes indeed. A few more interesting details to put the deal in context.

I have been asking myself why Winnebago bought Newmar. Perhaps you have as well. Was this all part of a carefully mapped out business strategy from the Winnebago executives?

Let’s see shall we?

Saying it was part of the Miller family’s long-term plan, Newmar Corp. President Matt Miller said he first approached Winnebago Industries President and CEO Michael Happe in April this year to see whether the “Flying W” would be interested in acquiring the 51-year-old motorhome manufacturer based in Nappanee, Ind.

Great. So Matt had been shopping the company. Did he approach other companies? Likely. Newmar’s long-term plan was to sell out which, obviously, was never publicly disclosed. Winnebago just happened to be the company that said yes. Interesting that Newmar initiated the discussion.

For all of the people posting on Facebook that Newmar will stay the same, let’s take a look at a recent Winnebago news release.

FOREST CITY, Iowa, Feb. 04, 2019 (GLOBE NEWSWIRE) — Winnebago Industries, Inc. (NYSE: WGO), a leading outdoor lifestyle products manufacturer, announced plans today to shift Winnebago-branded Class A diesel motorhome manufacturing from its Junction City, Oregon plant to its manufacturing campus in Forest City, Iowa. The strategic manufacturing transition consolidates and centralizes product development, supply chain, and assembly operations for the Company’s diesel motorhome business to a single location. This decision will enable the Winnebago Motorhome business to improve its ability to efficiently and consistently supply dealers and end customers with a stronger line-up of high-quality, innovative diesel products.

Further along the news release, we read the following:

“While the strategic purpose of the Company’s decision to move diesel manufacturing to Junction City years ago was well intended as a means to acquire additional motorhome assembly capacity and tap into an experienced RV workforce in the Northwest, we have not achieved our targeted operating efficiency and profitability goals,” said Brian Hazelton, Vice President and General Manager, Winnebago Motorhome Business. “This difficult decision to relocate diesel manufacturing back to Forest City, Iowa and centralize our diesel business value chain geographically is necessary. It will enable more effective product development, enhance profitability through increased manufacturing efficiency and sourcing savings, and most importantly result in being a more reliable supplier to our diesel dealers and end customers.”

There it is. The management imperative. It was necessary to centralize their diesel business value chain geographically to achieve operating efficiency and profitability goals.

It will be interesting to see if Winnebago management takes a similar approach with Newmar. They could, I suppose, move everything to the existing Newmar production facility. Or they could have multiple production facilities which they had tried before without achieving the targeted operating efficiency and profitability.

My old company, the Bank of Montreal and BMO Capital Markets, was part of the deal. You can read the entire agreement on Project Sunrise here.

In connection with execution of the Purchase Agreement on September 15, 2019, Winnebago executed a commitment letter with Goldman Sachs Bank USA, Bank of Montreal and BMO Capital Markets Corp. (the “Commitment Letter”).

Looks like Winnebago will borrow a fair amount of money to do the deal. The debt appears to be up to $290 million. The Winnebago management team will be under a bit of pressure to make the deal work.

In connection with execution of the Purchase Agreement on September 15, 2019, Winnebago executed a commitment letter with Goldman Sachs Bank USA, Bank of Montreal and BMO Capital Markets Corp. (the “Commitment Letter”). As set forth in the Commitment Letter, which is attached hereto as Exhibit 10.1, it is intended that Winnebago will (a) obtain up to $290.0 million in gross cash proceeds from the issuance of senior secured notes (the “Senior Notes”) and/or (b) if Winnebago does not, or is unable to, issue the full amount of the Senior Notes at or prior to the time of the closing of the acquisition, a senior secured bridge facility in an amount up to $290.0 million minus any gross cash proceeds received by Winnebago from the issuance of any Senior Notes or other securities.

Nothing like a little bit of debt to look at “synergies” to “maximize operating efficiencies”.

I have access to a few analysts that cover Winnebago (WGO XNYS). Here is what one of them had to say:

We are raising our fair value estimate to $37 from $33 [a share] after incorporating the company’s Sept. 16, 2019 announcement that it will acquire premium motorhome maker Newmar for about $344 million. The increase comes from a 40-basis-point increase in our midcycle EBIT margin to 8 percent which reflects Newmar’s EBITDA margin of 8.4 percent being 430 basis points higher than Winnebago’s motorhome segment margins.

Translation? Newmar was making more money on its motorhomes and that increases the fair value of the Winnebago shares.

And the view on Winnebago’s ability to execute?

Winnebago expects immediate EPS accretion, as do we.

However:

Management is targeting a 10% operating margin by fiscal 2020 which we think may not happen by then due to cyclical risk beyond management’s control.

During 2008 and 2009, Winnebago’s revenue fell by 31 percent and 65 percent respectively. Their gross margin in 2009 was an incredible negative 14.5 percent! And this analyst believes that the cyclical risk, meaning a downturn for the RV industry, is coming soon.

A few other details about Winnebago. Michael Happe, a relatively new CEO hired from Toro, brought in eight of his nine direct reports as either new to Winnebago or new to the role. Winnebago has a 10-10-10 plan for fiscal 2020: increase the North American RV share to 10 percent via organic growth, realize an operating margin of 10 percent and obtain 10 percent of revenue from RV segments or other outdoor businesses that the company is not in presently.

I’m still not happy about this deal but it is what it is. Miller wanted to sell Newmar and he went looking for a buyer.

Winnebago has ambitions to reach some aggressive financial goals and that will have a significant impact on what was once Newmar.

Winnebago did not go into debt to buy Newmar simply to let it continue to operate as an autonomous entity.

They have their goals.

10-10-10.

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