Arctic Cat cuts ties with Suzuki

  • Article by: JACKIE CROSBY , Star Tribune
  • Updated: December 29, 2011 - 8:19 AM

The Plymouth company paid $79 million to buy back its stock from its longtime engine-making partner. Investors applauded the move.

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Brandon Winter checked out one of the new Arctic Cats on display at Cities Edge Motorsports in Shakopee.

Photo: Kyndell Harkness, Star Tribune

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Arctic Cat Inc. said Wednesday that it has bought back all of its stock from Japanese engine maker Suzuki Motor Corp., ending a shareholder relationship that goes back more than two decades.

The $79.3 million cash deal for approximately 6.1 million shares of Class B stock pleased investors, who drove Arctic Cat's share price to its highest single-day gain since March 2009. Shares closed at $22.93, up nearly 21 percent.

Arctic Cat, based in Plymouth, designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles, as well as related parts, garments and accessories.

The company's move to buy out its longtime supplier was not entirely unexpected. Arctic Cat announced in June 2010 that it would stop buying snowmobile engines from Suzuki at the end of 2013 and move the manufacturing to its plant in St. Cloud.

"As Arctic Cat tries to become a more innovative company, operationally they've been moving apart," said analyst Craig Kennison, of Robert W. Baird and Co. in Milwaukee. "Financially they're now also severing some of those ties."

Suzuki will continue to supply engine parts beyond 2013, Arctic officials said Wednesday. A Suzuki representative resigned from Arctic Cat's board, effective immediately, and was not expected to be replaced.

Suzuki has supplied engines for Arctic Cat since 1976. It became a major shareholder in June 1988, paying $12.8 million for a 33 percent stake in the company, then known as Arctco. At the time, Arctco had just rebuffed a $25 million acquisition offer from Medina-based rival Polaris.

The relationship has paid off for Suzuki, including $57 million in buybacks and dividends plus $1 billion in sales of engines and parts over the past decade. Arctic officials said this played well as it negotiated what analysts viewed as highly favorable terms of the share repurchase deal.

Arctic Cat paid Suzuki $13 per share, when the day before the buyback was announced shares had closed at $19.

Arctic Cat and Polaris are among the top four players in power sports.

Since taking over at Arctic Cat at the beginning of this year, CEO Claude Jordan has focused on building a company with a strong balance sheet that can more quickly adapt to consumer preferences, Kennison said.

The company posted strong second-quarter earnings in October and increased its guidance for the year based on better-than-expected sales of snowmobiles. It has virtually no debt and an untapped $60 million credit line.

Following the completion of the Suzuki share purchase, Arctic Cat expects to end the fiscal year with more than $60 million in cash.

"Arctic Cat survived a very difficult environment for consumer discretionary products," Kennison said. "They've been building a balance sheet to handle this for some time."

Bringing the engine manufacturing work back to Minnesota won't affect profit margins much, but building closer to home is a key part of Arctic Cat's strategy, Jordan reiterated in a morning call to investors.

"The biggest advantage ... is the fact that we'll be able to control our own destiny," Jordan said. "If there are specific snowmobile engines, certain directions we want to go, this gives us flexibility to produce and manufacture those engines in-house and allows us to go into new spaces."

Jackie Crosby • 612-673-7335

 

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