Performance Sports Group Ltd., the distressed company behind the iconic Bauer and Easton brands, is moving ahead with a $575-million (U.S.) sale to Sagard Holdings Inc. and Fairfax Financial Holdings Ltd. since no other bidders have emerged after a three-month restructuring process.
The offer from Sagard, a U.S. investment firm controlled by Canada's wealthy Desmarais family, and Fairfax had been first announced on Oct. 31 when the sporting goods company based in Exeter, N.H., elected to file for bankruptcy protection in Canada and the U.S. At the time, PSG said that the asset-sale agreement was designed to set a floor for other competing bids and help achieve the best offer. By then, Sagard was the largest shareholder in PSG, amassing a 17-per-cent stake.
PSG retained New York City-based investment bank Centerview Partners LLC to manage the sale process and engage with potential buyers. In December, the company said it had signed non-disclosure agreements with roughly 30 interested parties and had given them access to its financial data. According to bidding procedures approved by the courts, if any rival suitors had emerged, the next step would have been an auction.
But no other qualified bidders submitted a bid by the Jan. 25 deadline, PSG said Thursday in a news release, leaving the Sagard and Fairfax offer as the only viable option for the company.
Investors did not react well to the news. Shares of PSG in the United States fell 50 per cent on Thursday to 69 cents in over-the-counter activity.
In early January, its shares had been trading at $1.65 and had even exceeded $1.90 within the past two months, as traders made bets on whether they believed other bidders were attracted to these assets, which are seen as being among the crown jewels in the hockey and baseball equipment markets. Higher bids would mean that more money would be available to repay the creditors and shareholders. Now, there is some uncertainty around how much can be recovered by equity holders, who rank behind the debt holders.
PSG will seek court approval at a final sale hearing scheduled for Feb. 6. The company said it expects the transaction to close no later than Feb. 27, subject to regulatory approvals and certain closing conditions.
Once finalized, the sale to Sagard and Fairfax will look to bring some stability back to a business that has been in flux.
PSG is highly leveraged and has suffered from declining sales. In addition to an internal probe into its accounting practices and an investigation by the U.S. Securities and Exchange Commission, the company has had to grapple with turnover in its senior ranks, broader staff layoffs, strained relations with some of its retail partners and the sporting-goods industry as a whole has hit hard times.
These are among the reasons why more bidders didn't emerge. The Globe and Mail reported this week that private equity firms across North America, including Bain Capital LP, and Canadian pension funds had taken interest in PSG but were steering clear in part because of its financial woes.
Recent internal financial reports, which had not been publicly disclosed, show that PSG has negligible EBITDA (earnings before interest, taxes, depreciation and amortization), according to sources familiar with the matter. EBITDA is often used by private equity firms to measure success and decide how to value a business.
Even still, PSG is managing its cash better than anticipated. The company recorded positive cash flows, which were higher than projected, during the 10-week period to Jan. 6, according to a recent report by the court-appointed monitor, Ernst & Young Inc.
While turning the company around may require heavy lifting from Sagard and Fairfax, it's clear the pair are optimistic about the future of PSG's brands, including Bauer and Easton.
Sagard and Fairfax have made a number of other investments in sporting-goods retailers and manufacturers. Through the Desmarais's broad global investments, the family is linked to a firm that has a seat on the board of Adidas AG, which owns Bauer's rival hockey equipment maker, CCM. And Fairfax owns a 75-per-cent stake in Toronto-based retailer Sporting Life.