Pacific Buys Cannondale

Congratulations to Pegasus Partners. Pegasus has just sold Cannondale to Pacific Cycle for $190-200 million (the final price will depend on this year’s EBITDA). Following the purchase of Cannondale out of bankruptcy for roughly $58 million in 2003, Pegasus rebuilt Cannondale from its ashes into a $200 million/annual company.

While it should be noted that prior to the Cannondale bankruptcy Pegasus was C’dale’s largest secured creditor, making its complete investment greater than the $58 million purchase price, it nearly tripled its investment in four years. Take that Wall Street!

Even so, it should be noted that today’s economic climate did not permit Pegasus to realize a multiplier on its annual revenue numbers. Not too long ago bike companies were going for three to five times earnings.

The press release announcing the sale named Dorel as the purchaser, as do all the stories in the media, but Dorel is Pacific Cycle’s parent company. Plainly put, Pacific bought Cannondale. Saying Dorel bought Cannondale is like saying the American people (rather than Ford) bought Volvo. Ford is a publicly owned company and its directors authorized the purchase of Volvo. Ford is the corporation we identify as the owner of Volvo.

So what’s the big deal, you ask? Pacific Cycle is a colossus of a bike company. Their lines include Schwinn, GT, Mongoose, Pacific, InSTEP, Roadmaster, Flexible Flyer, Powerlite, Murray and Dyno. It’s largest accounts aren’t respected IBDs but big-box chains: Wal-Mart, Target, Toys “R” Us, Sports Authority and Dick’s. Now ask yourself this question: When was the last time you walked into a bike shop you respected and saw one of those brands? Chances are, it was prior to 2001 when Pacific acquired Schwinn and GT. Pacific’s largest IBD account is Performance.

Performance has stores in most of the major cycling markets around the country. With more than 80 stores in 15 states, they are a larger retail operation than all of Trek’s and Specialized’s concept stores put together. What’s more is that Performance has plans to operate 150 locations by winter 2010, fueling the growth through acquisition of existing stores and opening new locations. Performance’s consolidation of its product lines is such that only one of its lines—Iron Horse—isn’t either owned by Pacific or Performance. The tally: Schwinn, GT and Mongoose are Pacific, while Scattante and Tirreno are Performance house brands. Now, multiply that by 80 locations … and growing.

Jeff Frehner, the president of Pacific Cycle is leaving his current role to head up the newly formed Cannondale Sports Group, which includes Cannondale and Sugoi as well as the brands Pacific will use to focus on the IBD channel: Schwinn, GT and probably Mongoose.

How significant is Frehner’s move? Frehner joined Pacific Cycle in ’07 to replace the retiring founder and CEO Chris Hornung. Hornung founded Pacific in ’77. It was under Hornung’s leadership that Pacific purchased Mongoose and Roadmaster and later Schwinn/GT and transitioned the brands into price points appropriate to big-box retailers.

Pacific’s management style is nothing if not clear. Each brand it has purchased has been removed from high-end IBDs and transitioned to focus on the price-point or entry-level segment consisting of sub-$2000 bikes.

Dorel’s Martin Schwartz had this to say: “Dorel recognizes the importance and potential of the Independent Bicycle Dealer channel and is purchasing Cannondale as the first step to become the world's number one IBD player. Cannondale will be the crown jewel of this new Dorel division, which will seek additional such growth opportunities.”

Given that supply-side integration is the big catch phrase these days, Schwartz’s words take on a rather ominous tone. First, just how does Pacific define IBD? Their definition would seem to include Performance, which defies any association with the traditional neighborhood bike shop, which is how many of us would define Independent Bicycle Dealer. Second, you can’t hope to compete as “the world’s number one IBD player” unless you consider Cannondale part of Pacific. Third, “seeking additional growth opportunities” means selling more bikes, and the easiest way to do that is to open up Cannondale to Pacific’s largest account. After all, private equity firms don’t engage in business models that depend on independently owned, single-location boutiques.

Performance has long lamented its unhip status to cycling insiders. It is no secret that Performance has long been considered to PRO what Kryptonite is to Superman. They’ve always lacked a premium brand that would in effect make their stores a destination. Landing Cannondale would be tantamount to being handed Excalibur by the lady of the lake.

Creating a concept store program based on a Cannondale/Schwinn/GT etc. formula may seem like a no-brainer, but there seems to be some hostility on the part of devout bikies for the folks who dumbed down Schwinn and GT. One could be forgiven for thinking that Cannondale will be dumbed down in a similar, if lesser, way.

So who are the winners in this? Well, Pegasus and … we’ll see. It could be Specialized and Trek and maybe some of the other brands with a complete product line that could replace Cannondale in IBDs, such as Felt.

It’s premature and unfair to sound the alarms regarding Cannondale’s future. It’s place in the pantheon of great brands is assured. No other brand has done more to advance the use of aluminum in bicycles than Cannondale; were it not for Cannondale, Gary Klein’s bikes would have seemed freakish, not the next wave, and who knows how much longer it would have taken for such a great idea—using thin-walled, large diameter tubing to gain stiffness and reduce weight—to gain traction.

That said, given Pacific’s history, vis-à-vis its management of acquired brands, things are likely to change for Joe Montgomery’s brainchild. It is fair to surmise many current Cannondale dealers will cease to carry the brand and we will soon see Cannondales available mail order through Performance’s web site. Or maybe not. But anyone who isn’t suspicious of how this will affect Cannondale hasn’t read Machiavelli.

Image courtesy of Cannondale.