ZQK: Worst Trade of The Decade?

This Quiksilver ski asset sale might go down as one of the worst consumer M&A deal this decade – despite seemingly timing the FX trade perfectly. Now what are we left with? Check out the timeline…

3Q05: Buys Rossi for $501mm at face value, including deferred purchase obligations. Seemingly rich at 11x EBITDA.

Subsequent 18 months, needs to infuse about $250mm in working capital. Takes EBITDA multiple to 16-17x.

3Q05-3Q08: Absorbs over $100mm in operating losses. Implied multiple goes to 30x+.

3Q07: Sells Cleveland Golf for $133mm.

3Q08: Sells Rossignol and other ski assets for €100mm, or $147mm – subject to working capital adjustments. This is key, because ZQK got disproportionately stuck with the working capital adjustment on the front end, and will likely not see an offsetting benefit on the back end.

When all is said and done, we’re looking at about $850mm in, and around $275mm out -- $133mm of which has already been realized.

The big question now is what we’re left with. The answer? One of the best names in teen apparel, sans the seasonality and low-return characteristics of ski equipment. Even the sucker trade outlined above still leaves enough cash flow to take down debt to total cap by 10+ points. I think there’s more low-hanging fruit here to take up margins than any other company in the space.

I think that $1.50 in EPS and $425mm in EBITDA in 2 years is completely doable. That’s 4.2x EBITDA based on today’s price and post transaction debt.

The ONLY thing preventing me from going all-in at this point is that even after the Rossi sale, 50% of sales come from outside the US. The good news is that I think that ZQK is one of the companies that has been treating FX benefits appropriately – by reinvesting them back into the model. The bad news is that I think they’ve been reinvested largely into the Rossignol model – and now that’s gone.

This name is near the top of my queue again for the deep dive. Stay tuned…
Where'd the FX benefit go?

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