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Stock Analyst Update

Winnebago Industries' Acquisition Is Transformative

The narrow-moat motor-home manufacturer's purchase of towable-maker Grand Design will increase total company revenue by more than 40% from fiscal 2016 levels.

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 Winnebago Industries (WGO) announced a transformative acquisition on Oct. 3 by saying it will purchase highly profitable towable maker Grand Design for about $500 million. Given the deal will increase total company revenue by over 40% from fiscal 2016 levels while also being accretive to operating margins by roughly 200 basis points a year compared with our prior model, we are increasing our fair value estimate to $32. The deal price is about 7.1 times trailing 12 months Grand Design’s $60 million of EBITDA after factoring in $75 million of Grand Design’s tax assets.

Winnebago will issue $105 million of new shares as part of the consideration, take on $353 million in debt, and pay $42 million from cash on hand excluding transaction costs. This new debt results in our weighted average cost of capital declining to 7.5% from 9%. We have long spoken highly of Winnebago’s debt-free balance sheet, but after the deal closes by the end of first quarter fiscal 2017 management estimates total liquidity of $75 million including over $50 million of credit line funds available, so we are not concerned about the new combined company’s health.

This deal is the type of action the board wanted when it changed CEOs. Grand Design’s over $400 million of towable revenue, 14% EBITDA margins compared with Winnebago’s 7.4%, and towable fifth wheel market share of over 9% immediately makes Winnebago a much larger company and gives it more diversification from motor homes. Grand Design appears to sell in a more premium segment than some other towables, which enables it to have strong margins. Combined revenue will be about 37% towables compared with about 9% towables currently for Winnebago. Management expects cost synergies via purchasing and eliminating processes to be $7 million, phased in over three years.

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David Whiston does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.