Business Context and Reporting Period
This Form 8-K, filed on August 1, 2016, reports on Compass Diversified Holdings (CODI) and its operating subsidiary, Compass Group Diversified Holdings LLC. The filing details the entry into a material definitive agreement and the acquisition of 5.11 Tactical, a leading designer and marketer of tactical apparel and gear.
Key Financial Metrics
- Acquisition Price: $400 million for 5.11 Tactical, subject to working capital and other adjustments.
- Target Financials (TTM ended April 30, 2016): Net revenue of approximately $293 million and EBITDA of approximately $38 million.
- Capital Expenditures: 5.11 Tactical incurs between $4 million and $5 million in annual maintenance capital expenditures.
- Financing Commitment: A $150 million Incremental Tranche B Term Facility commitment secured from Bank of America, N.A.
- Ownership Structure: CODI's initial equity ownership in 5.11 Tactical will be approximately 97.5%, with management retaining the remainder.
Material Changes and Transactions
On July 29, 2016, CODI subsidiaries entered into a Merger Agreement to acquire 5.11 Acquisition Corp. (5.11 Tactical). Upon closing, 5.11 Tactical will become a wholly-owned subsidiary of CODI. To facilitate this transaction, CODI secured a $150 million incremental term loan commitment on August 1, 2016, intended to finance a portion of the cash consideration and associated fees. The company plans to fund the remainder of the purchase price through its revolving credit facility and the accordion feature of its existing credit agreement.
Outlook, Risks, and Management Commentary
- Closing Timeline: The merger is expected to close within 45 days of the agreement date, though no assurances are provided that all conditions will be satisfied.
- Financing Expiration: The $150 million commitment expires on the earliest of October 29, 2016, the closing of the merger without using the commitment, or the acceptance of a superior offer by 5.11 Tactical.
- Risk Mitigation: CODI expects to obtain representation and warranty insurance to cover breaches of certain representations in the Merger Agreement.
- Conditions Precedent: Closing is subject to customary conditions, including the accuracy of representations and warranties and the performance of covenants by both parties.
Investor Verification Checklist
- Verify the final purchase price after working capital and other closing adjustments.
- Confirm the successful closing of the merger within the expected 45-day window.
- Monitor the utilization of the $150 million incremental term facility and the impact on CODI's overall leverage.
- Review the full text of the Merger Agreement (Exhibit 99.1) for specific indemnification terms and covenants.
- Assess the integration plan for 5.11 Tactical's international operations in Sweden, Mexico, Australia, China, and the UAE.