Polaris Industries Inc. has agreed to pay approximately $80 million for a large piece of KTM, a move that would give the Minnesota-based manufacturer an expanded retail network in Europe and valuable insight to off-road motorcycle production. At the same time, it offers the Austrian company strengthened presence in the United States and accelerated entry into the worldwide ATV market.
Polaris says it plans to purchase 24% of KTM Power Sports AG, the majority shareholder of KTM Sportmotorcycles AG, from an institutional investor for 66.6 million Euros. The transaction is expected to close during the third quarter of 2005.
KTM Power Sports AG, formerly known as Cross Holding AG, owns 99.77% of KTM Sportmotorcycles AG, and is publicly traded on the Vienna Stock Exchange under the symbol CRO. Principal shareholders are KTM CEO Stefan Pierer and KTM CFO Rudolf Knunz.
“Polaris can benefit from KTM's substantial experience in motorcycles, an outstanding brand, leading technology, and a solid manufacturing presence and dealer network in Europe,” Polaris CEO Tom Tiller said in announcing the deal.
“By joining forces, we believe we can strengthen KTM's presence in North America, reduce our production costs, spread our development costs over a larger base, and substantially accelerate our entry into the ATV business,” said KTM CEO Pierer. “We also look forward to sharing both chassis and engine technology with Polaris.”
Both companies say the “strategic partnership” is limited to a two-year period during its initial stage. Each company will continue to be run separately, but will work together on several specific cooperative projects involving new product development, engine technology sharing, purchasing, manufacturing and distribution.
After two years, in 2007, the two parties will evaluate the partnership. Polaris will have the option to purchase a majority of KTM, and KTM will have the option to repurchase its stock from Polaris.
If Polaris decides to buy additonal KTM shares, the majority of the purchase price would be in Polaris stock, through which Cross would become a significant shareholder in a combined Polaris/KTM organization. The exercise prices under both options would be arranged by market-based, predetermined pricing formulas to be derived from operating results of both companies in 2007.
Tiller, in a conference call with analysts, said KTM's announcement in January of an ATV development project served as a catalyst for the deal. “They said they were going into the ATV business, and we said we're looking to build a plant in Europe - and so if we hadn't gotten together now we would be competitors,” Tiller said.
Tiller confirmed that the two companies would be working on ATV projects, but said KTM would not be the sole benficiary of advanced technology. “They have class-leading power-to-weight ratios coming out of their motocross technology, so we're quite interested in looking to see if there may be applications there could be helpful to us.”
KTM says the first two years of the strategic partnership will focus on product development, manufacturing and distribution. During the initial stage, KTM will supply engines to Polaris; may do the final assembling of Polaris ATVs in Mattighofen for the European market; and, in selected European countries - Germany, Czech Republic, Slovakia - will handle the distribution of Polaris product.
“The exchange of know-how and R&D capabilities has the joint objective of accelerating development processes and increasing the rate of innovation for both companies,” KTM said in a prepared statement. “KTM has a strong distribution network in Europe; Polaris has a similar position in North America. Each company should profit from its respective partner's strength.”
Polaris says its purchase of KTM stock will be paid in cash, funded from the company's existing credit arrangement. The purchase price represents approximately a 12% discount to the market value of the shares.
The actual number of shares purchased and the purchase price are subject to reduction depending upon the number of shares of KTM Power Sports AG outstanding on the closing date.
In association with the deal, Polaris CEO Tom Tiller is expected to be named to the KTM Supervisory Board after the closing date of the transaction; and KTM CEO Stefan Pierer is expected to be named to the Polaris Board of Directors.
Both companies say the announcement will not immediately or directly affect any KTM or Polaris dealers, and all current KTM and Polaris dealer agreements that are in place will remain unchanged.
“Polaris dealers will carry Polaris product and KTM dealers will carry KTM product, at least for the first two years of the partnership,” Tiller said.
KTM Sportmotorcycle AG sold 77,000 units in 2004 and had revenue of 402.77 million Euros or about $484.22 million. The company's product portfolio consists of over 23 different off-road and on-road motorcycles ranging in engine size from 50cc to 990cc. The bikes are sold through a network of over 1,400 independent dealers and approximately 50 distributors worldwide, including KTM North America.
Polaris manufactures ATVs, snowmobiles, Ranger off-road vehicles, and Victory motorcycles. Traded on the New York Stock Exchange and Pacific Stock Exchange under the symbol PII, the company sold 270,000 units in 2004 and had sales of $1.8 billion.
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