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Quiksilver sells Cleveland Golf -- Should Adams Golf be next?
Posted Oct 31st 2007 5:05PM by Zac Bissonnette
Filed under: Deals, Management
After more than a month of rumors surrounding the possible sale of Quicksilver's (NYSE: ZQK) Cleveland Golf subsidiary, the deal is done. Quiksilver announced the sale last night, and will collect $132.5 million from SRI Sports, based in Japan.
It's interesting because it's roughly double what industry experts were initially estimating the company would sell for. Back in September, GolfWeek wrote that "Industry sources say Quiksilver Inc., which acquired Cleveland in 2005 as part of a deal to buy ski-maker Rossignol, is in the final stages of unloading the golf equipment maker for roughly $60 million to $70 million. Some analysts say the price is a bargain, noting Cleveland likely is worth at least $100 million, but they add an expedient sale even at a discount is in Quiksilver's best interests."
Recently, I've written about a stock I own called Adams Golf (OTC BB: ADGO), which I believe is very undervalued, in large part because of some corporate governance issues and managerial apathy toward the stock price (which is a good thing in moderation, but Adams may be at the opposite extreme). Using the sale of Cleveland Golf as a guide, I am convinced that Adams shareholders would be rewarded very handsomely if the company's board explored sale options. Take a look at some of the key stats
-Adams Golf has a market cap of $50 million (plus some to cover in the money options), and a net current asset value of about $40 million -- that doesn't include a deferred tax asset and some minor property, plant and equipment. On this amount, Adams did $76 million in sales last year, and is on track to surpass $90 million in sales this year. Adams had pretax income of $3.6 million last year, and is on track to easily surpass that amount this year.
-Cleveland Golf was sold for $132.5 million and, according to its latest balance sheet, has a book value of just $26 million. For the 9 months ended July 31st of 2007, Cleveland lost nearly $6 million, as sales stagnated and expenses rose.
True, Cleveland Golf's sales are substantially higher than Adams'. But the company isn't generating income, and its sales are likely buoyed by rich endorsement deals with pros like Vijay Singh. Adams invests almost exclusively in less expensive players on the Champions and LPGA Tours (A wise strategy for a small company, I think) -- increased investment in big name players could probably catapult Adams' sales up to a Cleveland scale fairly quickly. As CEO Chip Brewer (who should be congratulated for his excellent operational turnaround of the company) mentioned on the last conference call, Adams also has big opportunities for overseas growth -- and it doesn't sell putters right now either.
So how much is Adams worth in a sale? I don't really know. But given that the company is profitable and has tangible assets (almost all of which are current assets) of about $15 million more than Cleveland, along with strong sales momentum and dominance of the fast-growing hybrid market, I think it's a lot more than the stock's current price -- probably, I would argue, somewhere north of $3 per share, a 50% premium to the current price. The management and board of directors at Adams Golf needs to get on the stick, and find some way to deliver shareholders the returns they deserve. If not, an activist investor like Dan Loeb or Robert Chapman may needs to step in and start slapping people around.
Disclosure: Zac Bissonnette owns shares of Adams Golf |
