Bringing Arctic Cat under golf cart maker Textron Inc.'s umbrella might be just the deep-pocketed shove needed to push a determined but struggling underdog into the big leagues — or at least ensure survival, say longtime observers of the Minneapolis-based ATV maker.
Under new management brought in two years ago, Arctic Cat worked hard to slash excess dealer inventories, sponsor new racing events, launch products and significantly boost advertising.
It wasn't enough. Quarter after quarter, profits proved elusive. At the same, larger competitors such as Polaris Industries, Bombardier and Honda kept growing. Then came a softening of the ATV market over the last year.
"We acknowledge that Arctic Cat management has made material progress on the company's turnaround strategy, but additional near-term work remains in clearing channel inventories, accelerating innovation and operations efficiencies and upgrading the dealer network," Wells Fargo Securities equity analyst Timothy Conder said in a note to investors Wednesday.
Arctic Cat's stock price fell from $36 a share two years ago to $13.13 earlier this week. On Wednesday, after Textron offered $247 million, a 41 percent premium, to buy the company, its shares jumped 42 percent, or $5.46, to close at $18.55.
Two weeks ago, Robert W. Baird had lowered its rating of the company, noting Arctic Cat didn't have a hefty enough research-and-development budget or a big enough cost structure to absorb price discounts now flowing in an increasingly competitive and promotional environment. Baird analysts concluded that Arctic Cat had the "most to lose" relative to larger power-sports competitors as industry competition intensified.
"At the time, we indicated that Arctic Cat was struggling in a soft power-sports economy, pressured by weak discretionary income in key rural markets," said Baird equity analyst Craig Kennison. "As a subscale operator … Arctic Cat simply did not have the resources necessary to deliver a suitable return on investment as a stand-alone enterprise. We thought investors may push for strategic options if evidence of financial progress failed to materialize soon."
The Textron deal was announced Wednesday. If it finalizes later this year as expected, the larger Textron "may put to good use [Arctic Cat's] proud heritage, innovative history and loyal rider base," Kennison said.