Owl Creek Asset Management, an activist hedge fund that recently acquired a 2.5% stake in Brunswick Corp, issued a press release yesterday calling on Brunswick to spin off its fitness business from its marine engine/boat businesses.
“Owl Creek believes that the marine segment on a stand-alone basis is worth more than the current valuation for all of Brunswick, implying the market assigns negative value to the fitness segment,” said the Owl Creek statement. “We have shared with you our view that Brunswick shares are significantly undervalued… Brunswick is currently valued in the market at a significant discount to the combined value of Marine and Fitness if they were independently traded.”
Calling the discount a “conglomerate discount”, Owl Creek said that there is no “natural shareholder” for marine and fitness because of the “complexity” of analyzing the two businesses. The hedge fund said that “certain market participants” would invest in a leading boat and marine engine franchise, “but do not want to invest in or spend time analyzing a fitness equipment business.”
The investors wrote that Brunswick has one of the lowest valuations of 19 publicly traded companies in the boat manufacturing, engine manufacturing, powersports and leisure segments. The company is also trading “at a discount” compared to three other publicly traded boat manufacturers (Malibu Boats, MPC and MCBC Holdings). “The fact the Brunswick is trading at a substantially lower multiple than peers to its lowest quality business serves to highlight the extent of the conglomerate discount,” said the letter.
Creating two independent management teams and boards for different marine and fitness companies would also “sharpen the strategy, execution and culture for each of the businesses,” said the Owl Creek letter. “It would also enable the businesses to provide direct, share-based incentives to each of the management teams.”
Owl Creek said that such a transaction should be executed right away. “The marine trends are strong, and we believe will continue to be strong for the foreseeable future as boat sales remain well below scrappage rate,” said the letter. “Now is the time to capitalize on these favourable trends and cyclical tailwinds for the benefit of shareholders.”
In reply, Brunswick said it is always “open” to “constructive input” from our shareholders about ways to strengthen the company. “We appreciate the ongoing dialogue we have had with Owl Creek over the last several weeks," said Brunswick chairman and chief executive officer Mark Schwabero in a statement. "Our board has a proven track record of driving strong operating performance and taking decisive actions with respect to our portfolio as part of our commitment to delivering shareholder value."