With higher interest rates raising the costs of capital and inventory still clogging the retail marketplace, mergers and acquisition activity in the outdoor and action sports sectors has slowed to a trickle. However, dealmakers in the space see some recovery in the second half and remain bullish on the long-term prospects for the sector.

The pace of M&A across the active outdoor space reached fever pitch around 2021 when the pandemic catapulted interest in outdoor activities, ultimately doubling or tripling many companies’ sales.

“Many financial sponsors (private equity) and strategic buyers were thinking, ‘I’m going to miss the train in the station’ and M&A went bonkers,” said Nate Pund, managing director and global head of the Active Lifestyle banking team at Houlihan Lokey.

“I’ve been doing this for almost 25 years and that post-pandemic boom was the busiest 12 months of M&A in my life,” Pund said.

The enthusiasm proved short-lived. Supply chain disruptions cleared and eventually led to excess inventories across the marketplace, particularly in hardgoods and accessories areas such as bikes, stand-up paddleboards, and wetsuits as demand for outdoor activities dropped back closer to pre-pandemic levels.

With the need to mark down inventories along with inflationary pressures and slowed top-line growth, profits for the industry eroded, souring investors’ interest – at least temporarily – in the sector.

The Industry’s Attractive Long-Term Fundamentals

Longer term, healthy underlying megatrends are expected to drive robust M&A action in the active outdoor market despite the short-term pullback.

Tyler Dale, managing director, Hexagon Capital Alliance, said that prior to the pandemic, the outdoor and recreation industry was enjoying a shift in consumer behavior that started focusing more on “experiences over possessions,” driving purchases supporting everything from traveling to camping and sports.

“The lockdowns during the pandemic further drove people outdoors as many other activities were limited,” said Dale. While that level of demand is unlikely to be seen again, it has had a lasting effect by shifting people’s spending priorities, reintroducing them to a more active lifestyle, and continues to fuel the long-term, upward trend of getting outdoors.”

Pund cited the health and wellness trend as well as the community benefits of spending time together in the outdoors as other underlying drivers attracting investors to the space.

Matt Elberts, a director in the investment banking division of Baird who specializes in outdoor recreation and sporting goods, agrees.

“At Baird, we are very bullish on the long-term prospects for the outdoor recreation space,” he said. “Not only because the demographic and lifestyle trends have the outdoor recreation (industry) well positioned for long-term growth, but also because the new participants from COVID have proven very sticky in their activities. Investors love the sector but remain cautious as visibility into a full recovery remains foggy.”

Near-Term Hurdles Restraining M&A

Currently, the Fed’s 11 interest hikes over the last two years to combat inflation particularly weigh on private equity’s ability to complete deals since they often rely on debt to finance acquisitions.

The uncertain macro climate, including impact of inflationary pressures, geopolitical turmoil, and the upcoming U.S. election, also creates uncertainty around consumer spending, a concern for both potential financial buyers as well as strategic buyers. Strategic buyers are corporations typically operating in the same industry as the company they’re trying to acquire.

Many Potential Strategic Buyers Are Struggling

Pund further noted that many potential strategic buyers, such as VF Corp, Vista Outdoor, and Clarus are “very tied up trying to fix their own business” and being encouraged by major investors to refocus on their core brands rather than pursue acquisitions. Nike and Columbia Sportswear are two other major players in the space undergoing cost-reduction efforts and others are looking to shed brands instead of acquiring them, he said.

For example, In January, Wolverine Worldwide sold Sperry to Authentic Brands Group.

In February, VF Corp. announced a “strategic review of the brand assets within its portfolio” with its board of directors “to ensure the company owns the brands that it believes create the greatest long-term value.”

Some Wall Street analysts have speculated that the divestitures may have to include a major brand such as Timberland or Dickies to reach debt-reduction targets, and VF’s CEO Bracken Darrell has said “no sacred cows” will be spared in the review.

Last year, VF began exploring the sale of its packs business, including Eastpak, JanSport, and Kipling, but no buyer has been announced yet. Other niche brands owned by VF include Altra, Smartwool, and Icebreaker.

Last year, Deckers announced plans to divest Sanuk. In recent weeks, Kent Outdoors announced plans to sell Kona Bikes to focus on its water sports businesses while Amer Sports sold its ENVE Composites cycling wheels and components business.

Divestitures Driving M&A Action

Elberts of Baird said such corporate divestitures are a leading indicator that an M&A recovery is underway.

“Divestiture activity is a healthy part of any M&A cycle,” said Elberts. “Ultimately the past 10-15 years were very good to the outdoor recreation world and corporations should take the opportunity in quieter markets to strategically review their portfolio and refocus their limited resources and time on their most important assets.”

He said Baird is currently working on a half dozen divestiture-related assignments. Elberts said, “As M&A players see those deals in the market eventually close, that will build confidence in the environment generally and bring more dealmakers to the table.”

Strategic Deals Still Happening

Strategic deals also continue to occur despite the challenged investor climate where synergies between the two firms exist and where an acquirer can expand into new categories or distribution channels.

Brien Rowe, founder and managing director at Rowe | Tomes Advisors, cited Yeti’s acquisition of Mystery Ranch as a “great combination.” He elaborated, “They’re both pinnacle brands in our space. Yeti is more hardgoods with coolers having a slower repeat cycle. Mystery Ranch is more on the soft goods side with their bags and packs and the Mystery Ranch’s skills will translate well into the Yeti brand’s push into soft goods.”

This year Yeti also acquired Butter Pat Industries, a maker of cast-iron cookware, a category that can complement its range of coolers.

Former Boardriders Execs Leading new Companies

Rowe also pointed to HEPCO Capital Management’s acquisition of Original Waterman, a leading maker of lifeguard uniforms, in a deal his firm worked on. Rowe said Waterman is now led by former Boardriders vet Dan Levine who’s building out a team, including other former action sports industry players, to tap Waterman’s potential as a lifestyle brand.

Acquisition Criteria – Profitability Matters More Than Ever

In the current buyers’ market, the smaller group of potential acquirers are seeking out best-in-class platform companies, said Ken Wasik, senior managing director and lead in the consumer & retail practice at Capstone Partners.

“They need to be largely recession resistant, high gross margin businesses that are growing fast, and it is easy to scale them larger,” Wasik said.

Pund of Houlihan Lokey said PE buyers now are particularly placing higher importance on profitability along with the potential to reach a large addressable market.

“Up to this point, it was all about revenue growth and profitability would come later, with Allbirds offering an example of that,” Pund said. “Now, investors have realized they need to see profitability to be able to succeed. If we don’t have that early on, that’s a hard thing to go back and switch to.”

Brands Also Need a Loyal Customer Base

Dale of Hexagon Capital Alliance said “enthusiast brands” tend to garner the most interest as acquisition candidates.

“In a time when purchases are literally a click away and hundreds of off-brand substitutes can pop up overnight, consumers will gravitate to brands they know and that have a reputation for quality,” Dale said. “Brands with avid followers and repeat customers have a greater ability to scale outside of their current product portfolio and become attractive targets to acquirers.”

Dale also believes that given recent challenges, acquirers are looking more closely at a company’s ability to quickly adjust, whether to sudden hikes in input costs or to supply chain turmoil.

Elberts of Baird said that in the enthusiast market, having a dynamic consumer engagement system has become a more important factor in determining the attractiveness of a candidate, alongside innovative product and brand equity.

“Maintaining a direct line of dialogue with your consumers is essential,” said Elberts. ”The best companies have developed unique ecosystems where those conversations are happening on social media, e-commerce, email, traditional retail, owned retail, in-person and grassroots events, collaborations and more. These three elements—product, brand equity, consumer engagement—meld together to drive organic growth, which ultimately is the No. 1 factor in attractiveness and valuation.”

When Will the M&A Market Pick Up?

The return to healthier M&A activity in the active outdoor space is largely dependent on inventory levels across the marketplace returning closer to normal levels.

It also depends on broader macroeconomic issues, including whether inflation gets tamed, interest rates come down, and the economy and consumer spending hold up.

“We think M&A activity will pick up later this year and next year as company financial performance rebounds after an inflationary period, and the zone between seller and buyer valuation expectations tightens,” said Pete Bailey, senior director in Capstone’s Consumer Investment Banking Group. “We may see more add-on acquisitions initially, followed by platform acquisitions as M&A activity picks up.”

 

”There’s a heavy inventory of potential sale candidates, but the sponsors are choosing not to go to market right now because the number of buyers is pretty thin,” added Rowe of Rowe | Tomes Advisors. “Should the markets improve somewhat, we may see sponsors who have held onto assets for some time say, ‘Hey, we got to go to market’ and we’ll see some activity, but it’s going to be slower.” 

Elberts said while held back by high interest rates, private equity’s interest in the outdoor recreation space still appears high not only due to the underlying fundamentals but because of the strong presence of strategic (buyers) in the sector.

“That provides confidence to the private equity community that there will be multiple exit options when it comes times for sponsors to monetize their investments,” he said.

Authentic Brands, which acquired Boardriders last year, remains an aggressive acquirer in the space while many who’ve lately been on the sidelines, including Vista Outdoor (Revelyst), Clarus, and Amer Sports, are expected to become more acquisitive as conditions in the marketplace normalize.

Pund cited more visibility into the industry’s inventory overhang, the possibility of lower interest rates, and strength of the consumer as key factors supporting a recovery.

“I think we’re going to see more M&A activity as inventories further rebalance this fall and then 2025 will be a very, very busy year,” Pund said. “The industry’s fundamentals remain solid.”

Capstone’s Wasik also remains confident that heightened demand for “experiential/recreational” activities, led by youth, will continue to support a robust outlook for M&A in the outdoor space.

“Even though we are seeing signs of slowing, it is temporary, and long-term demographic trends will ultimately drive things,” said Wasik. “The consumer enthusiast is generally overleveraged, feeling the impact of inflation, and spent heavily on goods during COVID. The first two will be solved when the economy gets on a better footing, the last is simply time.”