If you believed the reports from the financial sector, Harley-Davidson is a prime candidate right now for a hostile takeover by Kohlberg Kravis Roberts (KKR), a global private equity firm.
The news sent shockwaves through Wall Street, with Harley-Davidson’s stock gaining 20% in value in a single day, as investors tried to capitalize on the news.
You are just hearing about this news on Asphalt & Rubber though for two reasons, 1) I’ve been on either a motorcycle, plane, trolley, or car for the past few days (just getting back from Italy), and 2) we have seen this all this before, and it wasn’t pretty.
What set off this news was a report that KKR, one of the largest private equity (PE) firms in the world with about $126 billion in assets under management, was said to have its eyes on Harley-Davidson.
For those who don’t know, KKR has made a name for itself by conducting leveraged buyouts on vulnerable companies, and the rumors lately see KKR making an offer to buy all outstanding Harley-Davidson stock for $65 per share – that’s a 35% premium over Harley-Davidson’s current stock price, which we would argue is still inflated because of the takeover news.
What Does This Mean?
If successful, and that’s a big if (we will get to that in a minute), KKR could be come the new owner of Harley-Davidson, or at least potentially the new majority-share owner of Harley-Davidson, which would give the PE firm control of America’s most iconic motorcycle brand.
This could also potentially mean that Harley-Davidson could become a private company, which could fundamentally change the way the motorcycle brand operates, and what its business priorities are, going forward.
The whole premise behind an LBO (leveraged buyout) is that the acquiring company (KKR) feels that the target company (Harley-Davidson) is under-valued, which could come from a variety of reasons like market uncertainty, poor leadership, access to capital, etc.
A company like KKR would buy a company, fix whatever business issue is causing it to lag in the marketplace, and then usually sell the company to another firm or take it public (put it back on the stock market).
In very few cases does a PE firm like KKR keep a company for its cash dividends, though it does happen.
Why Does This All Sound A Little Fishy?
Astute readers will remember this exact situation already played out, six years ago. The situation was the same: an unsubstantiated rumor on Wall Street about KKR taking over Harley-Davidson spurred HOG stock to a princely sum.
The result? No buyout, but there was an investigation by the US Securities Exchange Commission into possible stock price manipulation. Could the same be going on here? That’s hard to tell.
Maybe KKR is taking another go at Harley-Davidson, whose stock has been on the decline for the past two years, but nowhere near its 2010 price bottom. Or Maybe, Blue Horseshoe just really loves Anacott Steel.
Time will tell on how these rumors pan out, though we are skeptical. Harley-Davidson might not be having record-setting sales right now, but the company is mean and lean, thanks to former-CEO Keith Wandell.
It’s business operations are efficient, it’s core demographic is slowly bouncing back to full-wallet status, and the motorcycle industry as a whole is starting to warm-up again. None of these factors make Harley-Davidson particularly attractive to an investor like KKR.
Harley-Davidson is the abnormality in the US motorcycle industry, and almost should be excluded from its market calculations. The company sells on brand, not product, and while it’s getting strong competition right now from Indian (and a lesser extent Victory), there are signs of life inside the company to bring out intriguing new machines.
Or course, time will tell on all this. Stay tuned.