The Market is Wrong on Vista Outdoors

Vista Outdoors (VSTO) surprised the market when it announced on October 16 that it would sell its Sporting Products business.

The market didn’t like the deal as the stock fell by ~24%.

And reaction from X (twitter) was the same:

But if you take a step back, the situation looks kind of interesting now.

Taking a Step Back

On May 5, 2022, Vista announced that it would break up into two companies.

A Sporting Products (guns & ammunition) and an Outdoor Products business.

The plan was to spin-off the Outdoor Products business and the Sporting Products business (guns) would become RemainCo.

The thesis for the spin-off was that Outdoor Products companies trade at premium valuations to guns & ammo companies due to ESG concerns.

Here are the Outdoor Products comps that management has cited in its presentation.

Here are the Sporting Products comps that management has cited in its presentation.

The disappointing market reaction was related to the sales price of the Sporting Products (guns & Ammo) business.

Management noted the business will be sold for ~5x EBITDA.

As you can see from the comps above, peers trade at 6.5x EBITDA.

I think the sale price is a little light but not horrible. The revenue multiple is 1.3x which is inline with peers. If the Sporting Products business were to trade as a separate entity, I’m not sure it would trade much above 5x EBITDA.

What is interesting is what is going to be done with the cash.

The sale price is $1.91BN.

I assume 5% transaction costs and management has guided that it has structured the sale in a tax efficient manner such that it will only have to pay $50MM of taxes.

With the proceeds, Vista will repay its $986MM of gross debt and return $750MM of cash to shareholders (I’m assuming a special dividend).

That will leave ~$28.5MM of cash to be added to Vista’s balance sheet.

Vista already has $63MM of cash on its balance sheet.

Plus, I expect the company to generate another $176MM in cash before the transaction closes (average FCF generation over the past 3 years was $346MM).

So once the transaction closes and the special dividend has been paid out, Vista should have $265MM of net cash on its balance sheet.

RemainCo Valuation

What’s the right valuation for RemainCo?

Updated guidance is for Outdoor Products revenue of $1.3BN and adjusted EBITDA guidance of $104MM.

The comps that management cited in its spin-off presentation trade at 1.9x revenue and 10.4x EBITDA.