CCC Investments Acquisition of Arctic Cat

Jack Brown

Logan Handibode

Keith Preston

Kurt Wunderlich

Marty Christensen

CCC Investments Fund I• Funds

– 2008 CCC Investments Fund III LP $700 Million– 2006 CCC Investments Fund II LP $450 Million– 2004 CCC Investments Fund I LP $250 Million– Fund life = 7 years (2015)

• Areas of Expertise:– Business Services– Operations Management– Finance– Consumer Services– Legal– Media/Communications

CCC Fund III – Investment Criteria

Size of investment $10M – $200M

Size of target company $10M – $300M

Investment stage Beyond early stage

Type of target company Public or private

Type of transaction Acquisition, LBO, Buy-and-build, Recapitalization

Ownership requirements Majority required

Board representation Mandatory

Geography Midwest

Holding period 3-7 years

Management Team

• Over 40 Years Mgmt Experience including:– Corporate Finance– Manufacturing Operations– R&D Engineering– Logistics– M&A and PE transactional experience– Legal

Artic Cat Inc. Background

• Thief River Falls, Minnesota• Products: Snowmobiles, ATV’s, and General Parts & Accessories• Design, engineer, manufacture and market snowmobiles and ATV’s

as well as related parts/service operations• Market through distributors/dealers network (US, Canada , EU)• Strong brand +40 years• Nasdaq ticker: ACAT• NO FINANCING ARM: Customers rely heavily on independent

financing

ACAT Financial Highlights

• Price (11/7/08) = $7.62• Market Cap = $137M• EPS (end 3/30/08): ($.18)• 52 week range: $17.95 - $6.30• No long-term debt• Future EPS Consensus (3/30/09): $.11

2004 2005 2006 2007 2008Revenue 649.60$ 689.10$ 732.80$ 782.40$ 621.60$ EBITDA 63.20$ 60.80$ 56.40$ 58.30$ 20.60$

ACAT Product Info• SNOWMOBILES:

– Full line of snowmobiles including 41 total models– Retail prices range from $5,500-$13,000 per unit– Model categories are: Performance, Mountain, Crossover, Touring &

Utility• ATV’S:

– First model produced in Dec ’95– Offering has grown to 24 models– Retail prices range from $3,600 to $10,500 per unit– Model categories are: Performance, Mountain, Crossover, Touring &

Utility

• Parts, Garments & Accessories– Growing segment for ACAT

ACAT Product Breakdown

Industry Background

Snowmobiles• 1950’s to 1970’s dramatic industry expansion• Reached peak of over 100 mfg’s & 500K units

sold in 1971• After consolidation - 4 main participants:

– Arctic Cat– Bombardier (BRP)– Polaris– Yamaha

• Barriers to Entry – increased brand loyalty, longstanding dealer/distributor networks, limited engine sources, high start up costs

Industry Background

All-Terrain Vehicles (ATV’s)• Early 1970’s evolution to the current 4 wheel model • Sales climbed to 535K units in 1986, fell to low of 147K by 1991• Sales in 2007 domestic reached 637K units and 88K units in

Canada• Major players include:

– Arctic Cat– Honda– Yamaha– Kawazaki– Bombardier– Polaris– Suzuki

Industry Analysis

• Adverse affects of “credit crunch”, recessionary pressures• Unexpected increase in raw materials• Increased competition in ATV and snowmobile markets• Impact of weather – inadequate snowfall• Increased consolidation within industry • Customer demographics (lower income groups) are greatly

impacted by constrained credit market and macroeconomic concerns

• Overall ATV industry sales decline of 20 -30%

Industry Outlook is Negative

ACAT’s Largest Competitor - Polaris

• Revenue = $1.8B (3x ACAT)• Market cap = $1.05B (7.7x ACAT)• Synergies with ACAT:

– Geography – all mfg and product development in MN and surrounding states

– Dual product line – ATV, snowmobiles– Customer base – mostly North America– Also looking for growth internationally

Comparables (Polaris 2007)Data ($millions) Multiples:

Revenue 1,780.0 Enterprise Value/Revenue

0.69

EBITDA 253.9 Enterprise Value/EBITDA

4.82

EBIT 185.4 Enterprise Value/EBIT

6.60

Book Value 1,050.0 Enterprise Value/Book Value

1.16

Enterprise Value 1,223.0

Mkt Value of Equity 1,023.0

Value of Debt 200.0

ACAT as Polaris (ACAT 2009)Data ($millions) Implied Valuation

($millions)

Revenue 497.3 341.7

EBITDA 15.4 74.3

EBIT 0.5 3.3

Book Value 137.0 159.6

$144.7 (Average)

 

Enterprise Value /

RevenueEnterprise Value /

EBITDA 

Arctic Cat 0.23 7.63

Polaris 0.62 4.84

Harley Davidson, Inc. 1.25 5.29

Honda Motor Co. Ltd. 1.04 9.16

Winnebago Industries, Inc. 0.23 22.12

Callaway Golf Co. 0.58 4.97

Marine Products corp. 0.82 9.98

Industry Averages (Except Arctic Cat) 0.68 9.39

   

Arctic Cat $338.9 $144.8

Leisure/Power Sports Industry Comparables

APV Valuation

• APV Valuation = $187.7MBased on 5 year forecast with the following assumptions

– Several declining years of revenue before rebounding conservatively(-20%, -12%, 2%, 7%, 7%) due to macro pressures - ATV outlook forecasts 20% decline

– 2008 EBIT = -1.5% of revenue that eventually returns to 4% in 2013– Rise in revenue 2011-2013 based on Mesirow Financial's Econ. Forecast that by

end of 2009 personal consumption and disposable income will begin to rise– Depreciation and Amortization kept steady at ACAT's avg of 3% of revenue– Taxes held constant at historical rate of 31.02%– Changes in Net Working Capital based on last 5 years of history (% of revenue -

approx. 18%)– CAPEX decreasing in 2009 as business declines, keeping in line w/ revenues -

begins ramping back up in 2010 as business begins growth through 2013– 6% rate on Senior Bank Debt due to our AAA rating– Risk free rate is 3.5% based on 10 yr Treasury Note as of 11/10/08

Transaction Structure/Funding

• Agreement and Plan of Merger• 18.07M shares issued and outstanding• $10.10/share of capital stock• Purchase Price = $182.5M• CCC expect to fund $63M in equity and

$63M in senior secured debt• Suzuki Motor Corporation will rollover its

33% stake valued at $62.1M

CCC Value-Add

1. Reduction in total models, phasing out of older or unsuccessful models

2. Grow international sales: EU & Asia– July 2005, acquired 100% interest in EU company marketing ATV

3. Broader engine strategy: development, technology, manufacture, engineering expertise (Suzuki partnership 30%)

4. Conform operational process and production to create pre-merger synergies for trade sale with Polaris

5. Financial engineering though Debt financing, utilize tax shield

Exit Strategy

• Primary: Trade Sale – Polaris– Synergies: operations, location (MN), component sourcing,

customers, etc.– ACAT is appropriate size for acquisition (1/3 of Polaris)– Polaris can expand customer financing to ACAT customers

• Secondary: Trade Sale - Suzuki Motor Corp.– Gain entrance into the U.S. market with an established ATV and

snowmobile producer– Allow Suzuki to move more of its products such as motorcycles and

scooters into the U.S. – Directly compete with Polaris– Advantage of being familiar with Arctic Cat

Exit Strategy Cont’d

• Third: Trade Sale to Bombardier (BRP)

• Fourth: IPO– U.S. markets should pick up in the next several years

• Lastly: LBO of LBO– Operational and financial value-add

Deal Summary

Strategy ACAT Actual•Size of Investment $10 - $200 million $63m •Size of Target Company $10 - $300 million Market Cap of $137m •Investment Stage All beyond early stage Beyond Early Stage •Type of Target Company Public or private companies Public Company (NASDAQ) •Type of Transaction LBO

•Ownership Requirements Over 50% 67%•Board Representation Generally required Control of Board•Geography Primary: USA ; Midwest Minnesota•Typical Holding Period 3 - 7 years 3 - 7 years

ACAT Investment Criteria

Acquisition, LBO, Buy-and-Build, Recapitalization

Questions???

Works Cited

1) Arctic Cat 10-K for the fiscal year ended March 31, 2008• http://www.sec.gov/cgi-bin/browse-edgar?

company=Arctic+Cat+&match=&CIK=&filenum=&State=&SIC=&owner=include&action=getcompany

2) Arctic Cat 2008 Annual report for the year ended March 31, 2008• http://library.corporate-ir.net/library/97/979/97941/items/303803/

ArcticCat_2008_AR.pdf

3) Arctic Cat 10-Q for the quarter ended June 30, 2008• http://www.sec.gov/Archives/edgar/data/

719866/000110465908051716/0001104659-08-051716-index.htm

4) Arctic Cat 10-Q for the quarter ended September 30, 2008• http://www.sec.gov/Archives/edgar/data/

719866/000110465908069732/0001104659-08-069732-index.htm

Works Cited

5) Arctic Cat Definitive Proxy Statement• http://www.sec.gov/Archives/edgar/data/

719866/000089710108001473/0000897101-08-001473-index.htm

6) Arctic Cat Website• http://www.arctic-cat.com/

7) Swonk, Diane. (20081 November 10). Mesirow Financial Themes on the Economy.

8) FTN Midwest Securities Corp. Arctic Cat Report, dated September 15, 2008

9) FTN Midwest Securities Corp. Arctic Cat Report, dated October 15, 2008

10) KeyBanc Capital Markets Leisure Industry: 3Q08 Earnings Preview