GATES CAPITAL MANAGEMENT OPPOSES VISTA OUTDOOR'S PROPOSED SALE OF THE KINETIC GROUP TO CSG

Rhea-AI Summary

Gates Capital Management, owning 9.6% of Vista Outdoor (NYSE: VSTO), opposes the proposed $2.1 billion sale of The Kinetic Group to CSG. They argue the price undervalues the asset, which generates over $400 million in annual free cash flow. Gates Capital criticizes the early retirement of $500 million in low-interest debt and the plan to keep $250 million cash at Revelyst post-sale.

The investor suggests three alternatives: 1) Secure a higher price for The Kinetic Group, 2) Engage with MNC Capital's $42 per share bid for the entire company, or 3) Revert to the original tax-free spin-off plan. Gates Capital emphasizes that these options would better serve shareholder interests than the current CSG proposal.

Positive

• The Kinetic Group generates substantial free cash flow, averaging over $400 million annually for the past four years
• MNC Capital has made a $42 per share bid to acquire all of Vista, providing a potential alternative transaction
• A tax-free spin-off option could create two standalone public companies, potentially delivering strong shareholder returns

Negative

• The proposed $2.1 billion sale price for The Kinetic Group is considered inadequate by a major shareholder
• Early retirement of $500 million in 4.5% coupon debt may transfer $1.50 per share value from shareholders to bondholders
• Proxy adviser ISS has recommended voting against the CSG transaction
• The plan to keep $250 million cash at Revelyst post-sale is viewed as not in shareholders' best interest

Insights

Financial Analyst

Gates Capital Management has raised several key points about the proposed sale of The Kinetic Group by Vista Outdoor, Inc. One of the most critical aspects mentioned is the $2.1 billion sale price. According to Gates, this amount does not reflect the full value of The Kinetic Group, which has shown substantial free cash flow averaging over $400 million annually for the past four years.

From a financial perspective, the concern here is that Vista might be selling an undervalued asset, potentially missing out on greater returns in the future. Gates Capital Management's argument is bolstered by the recommendation from Institutional Shareholder Services (ISS) to vote against the transaction, which could indicate broader skepticism among institutional investors. If the Board pushes through with the sale, it could result in short-term cash inflow but potentially at the expense of long-term shareholder value.

Additionally, the early retirement of $500 million debt is another point of contention. Gates suggests this action unjustly benefits bondholders at the expense of shareholders, transferring more than $1.50 per share in value. This could erode the potential gains for equity holders and might be seen as a poor financial maneuver considering the debt's low coupon rate of 4.5.

Investors should keenly observe how the Board responds to this opposition. The decision could significantly impact Vista's stock price and its future financial health. A revised strategy, such as negotiating a higher sale price or exploring alternative transactions, may provide better outcomes for shareholders.

Market Research Analyst

The potential sale of The Kinetic Group by Vista Outdoor touches on broader market dynamics. The proposed transaction to Czechoslovak Group a.s. (CSG) at the purported price of $2.1 billion brings into focus how market players perceive the value of such specialized assets. Gates Capital Management's alternative proposal to consider an all-cash bid from MNC Capital at $42 per share highlights the competitive bidding landscape and suggests there may be latent demand for Vista’s business at higher valuations.

From a market standpoint, the push for a tax-free spin-off is intriguing. Spin-offs often unlock hidden value by allowing each entity to focus on its core operations. The Kinetic Group, if spun off, could leverage its strong cash flow to drive dividends and share repurchases, potentially leading to higher market valuations independently.

For retail investors, understanding these market dynamics is crucial. The moves by Gates Capital Management indicate that there may be underappreciated value within Vista Outdoor. Investors should evaluate the possible outcomes of different transactional routes — be it a sale, a spin-off, or a higher bid — and how each scenario could impact the stock's market performance and future growth potential.

Sends Letter to Vista Board of Directors Outlining Why Tax-Free Spin-Off or Cash Offer for the Entire Company Are Superior to the Proposed Sale of The Kinetic Group

NEW YORK, July 17, 2024 /PRNewswire/ -- Gates Capital Management, Inc. ("Gates Capital Management" or "we"), an event-driven alternative asset manager that beneficially owns 5,589,041 shares, or approximately 9.6%, of Vista Outdoor, Inc. ("Vista" or the "Company") (NYSE: VSTO), today sent a letter to the Vista Board of Directors (the "Board") regarding its intention to vote AGAINST the pending sale of The Kinetic Group to Czechoslovak Group a.s. ("CSG").

July 17, 2024

Vista Outdoor Inc.
Attn: Board of Directors
1 Vista Way
Anoka, Minnesota  55303

Dear Members of the Board,

Gates Capital Management is one of the largest shareholders of Vista, beneficially owning 5,589,041 shares, or approximately 9.6%, of the Company.  We are writing to the Board to express our concerns regarding the pending sale of The Kinetic Group to CSG.  

We strongly oppose the sale at the proposed price of $2.1 billion and believe that Vista shareholders deserve a higher price that accurately reflects The Kinetic Group's financial strength and future potential.  The Kinetic Group consistently generates substantial free cash flow, which averaged more than $400 million annually over the four years ended March 2024 (free cash flow is Operating Income plus Depreciation and Amortization, minus $20 million of annual corporate expense and $25 million of annual capital expenditures).  We believe the proposed sale price does not fairly value this cash-generative asset.  Additionally, the current proposal retires $500 million of inexpensive 4.5% coupon debt well ahead of its 2029 maturity.  This early debt retirement transfers more than $1.50 per share of value from Vista shareholders to bondholders, which we find unacceptable.  In the event of a higher bid by CSG, we believe Vista's plan to keep $250 million of cash at Revelyst after the sale is not in the best interest of Vista shareholders and the amount should be reduced to $50 million with the additional $200 million being returned to Company shareholders. 

Given the inadequacy of the proposed CSG transaction, we were not surprised to see that proxy adviser Institutional Shareholder Services (ISS) recently recommended voting "AGAINST" the transaction.

Separately, we believe that the $42 per share bid from MNC Capital ("MNC") to acquire all of Vista provides a reasonable starting point for Vista to negotiate a superior transaction versus the current CSG proposal.  Both the CSG transaction and MNC proposal are fully taxable, but only the MNC proposal would deliver the certainty of an all-cash payment at closing.

Finally, we would support Vista's original plan of a tax-free spin-off, separating The Kinetic Group and Revelyst into two standalone public companies.  This plan could include $50 million of cash allocated to Revelyst and a commitment from The Kinetic Group to pay out at least 75% of its free cash flow in dividends and share repurchases annually.  We believe this decision would provide an excellent opportunity for both businesses to deliver strong shareholder returns over time.

We urge the Board to reconsider its currently proposed transaction and to act in the best interests of all shareholders by either securing a materially higher price for the Kinetic Group, engaging with MNC to sell the entire Company, or reverting to Vista's original spin-off plan.

Sincerely,

Jeff Gates
Managing Partner
Gates Capital Management

About Gates Capital Management
Gates Capital Management is an event-driven alternative asset manager for institutional and private clients globally.  Gates Capital was founded in 1996 and today has more than $2 billion in assets under management.  Further information is available at www.gatescap.com.

Cautionary Statement Regarding Forward-Looking Statements

This press release does not constitute an offer to sell or solicitation of an offer to buy any of the securities described herein in any state to any person. The information herein contains "forward-looking statements". Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as "may," "will," "expects," "believes," "anticipates," "plans," "estimates," "projects," "potential," "targets," "forecasts," "seeks," "could," "should" or the negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe our objectives, plans or goals are forward-looking. Forward-looking statements are subject to various risks and uncertainties and assumptions. There can be no assurance that any idea or assumption herein is, or will be proven, correct or that any of the objectives, plans or goals stated herein will ultimately be undertaken or achieved. If one or more of such risks or uncertainties materialize, or if Gates Capital Management, Inc's ("Gates") underlying assumptions prove to be incorrect, the actual results may vary materially from outcomes indicated by these statements. Accordingly, forward-looking statements should not be regarded as a representation by Gates that the future plans, estimates or expectations contemplated will ever be achieved.

Media Contacts:
ASC Advisors
Taylor Ingraham / Morgan Davis
tingraham@ascadvisors.com / mdavis@ascadvisors.com
203-992-1230

Investor Contact:
Paul Lucas
Managing Director
plucas@gatescap.com
212-626-0290

 

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SOURCE Gates Capital Management

FAQ

Why is Gates Capital Management opposing Vista Outdoor's (VSTO) sale of The Kinetic Group to CSG?

Gates Capital Management opposes the sale because they believe the $2.1 billion price undervalues The Kinetic Group, which generates over $400 million in annual free cash flow. They also object to the early retirement of low-interest debt and the plan to keep $250 million cash at Revelyst post-sale.

What alternatives does Gates Capital suggest for Vista Outdoor (VSTO) instead of the CSG deal?

Gates Capital suggests three alternatives: 1) Secure a higher price for The Kinetic Group, 2) Engage with MNC Capital's $42 per share bid for the entire company, or 3) Revert to the original tax-free spin-off plan separating The Kinetic Group and Revelyst into two standalone public companies.

How much of Vista Outdoor (VSTO) does Gates Capital Management own?

Gates Capital Management beneficially owns 5,589,041 shares, or approximately 9.6%, of Vista Outdoor (VSTO).

What is the stance of proxy adviser ISS on Vista Outdoor's (VSTO) proposed sale to CSG?

According to the letter, proxy adviser Institutional Shareholder Services (ISS) has recommended voting 'AGAINST' the proposed sale of The Kinetic Group to CSG.