Public offering

A drastic diet and makeover can’t disguise BRP’s biggest weakness

MONTREAL — The Globe and Mail

To José Boisjoli’s credit, BRP management has cut costs, while preserving its research and development budget. (CHRISTINNE MUSCHI/REUTERS)

You know the drill. When private equity funds pick up companies, they beat them into shape, pretty them up and then flip them over – making a killing in the process.

That is when things go right. But nothing went as planned with BRP Inc., Bombardier’s former recreational products unit which was sold for more than $1.2-billion in 2003, when then-president Paul Tellier determined that snowmobiles, watercraft and other adult toys didn’t quite fit in with planes and trains.

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Bain Capital, BRP’s biggest shareholder with a 46-per-cent stake, was mulling its exit when the financial crisis hit in 2008. It hurt as if the Quebec-company had driven one of its Ski-Doos right into a tree. Sales fell by more than a quarter, profit was cut in half.

Five years later than planned, BRP is now making its way back to the stock market. And the preliminary prospectus released this week shows the company has barely recovered from the trauma. Sales of $2.9-billion in the past fiscal year just surpassed their precrisis level. And the profit of $121-million is inferior to where it stood in 2003 – and that was no great year.

To wait for luck is to wait for death, or so the Japanese saying goes. However, you cannot help but wonder whether BRP’s initial public offering is not premature.

Of course, Bain is impatient to pull out its money. Mitt Romney’s former firm found a not-so-subtle way to cut its losses. BRP will use the money collected from its share offering to repay the loan it recently took to reward its shareholders with a $376-million dividend. Bain is partners with the Bombardier-Beaudoin family (holding a 35-per-cent stake) and the Caisse de dépôt et placement du Québec (14 per cent). The payback won’t stop there, either. Shareholders will receive another $155-million prior to the closing.

But where does that leave BRP? Not in splendid shape, I am afraid.

To CEO José Boisjoli’s credit, management has done almost everything in its power to reduce BRP’s costs, while preserving the company’s research and development budget.

Production of all of its off-road vehicles was outsourced to Mexico. Moreover, with the construction of a second plant, in Queretaro, BRP will soon transfer all of its personal watercraft production from Canada. Another 500 jobs will be lost on top of previous layoffs. This will save the company up to $25-million annually.

BRP also diversified its sales, which were traditionally concentrated in North America. Sales outside of Canada and the United States now represent 35 per cent of BRP’s business, almost double what they were in 2003. Hence the company is less vulnerable to a downturn in Canada and somewhat less dependent on a faster recovery in the United States.

Even so, the international economic outlook remains clouded with the lingering recession in Europe, the slowdown in China and the conflicting signs coming out of the United States and Canada.

And this is where BRP’s weakness is the most apparent. Even if the company contends that no single product line accounts for more than a fifth of its sales, all of its products are pricey toys for grownups. They all fall into the “first-thing-I-would-cut-if-I-lost-my-job” category.

Distancing itself from seasonal snowmobiles and watercrafts, BRP is pinning its hopes on its year-round products. Some all-terrain vehicles are useful, so demand for those could better weather downturns. However, BRP ranks fourth in this market, according to its own estimates. It fares better in the newer side-by-side vehicles, but here again, these are mostly used for recreational purposes.

And then there is BRP’s roadster, named the Spyder, a three-wheeled on-the-road vehicle (two in the front, one in the back) that BRP introduced in 2007. It is considered to be a motorcycle, even if some bikers look down on this stable roadster as if the Spyder were a bike for the geriatric set.

Living in Valcourt, Que., the small town in the Eastern Townships where Joseph-Armand Bombardier was born and where BRP is headquartered, you could be forgiven for thinking Spyders are popular, as they zoom back and forth on Main Street. Outside Valcourt is another story, however. The Spyder remains more of a curiosity than a popular means of transport.

What is probably more telling than anything else is that no other manufacturer has launched a competing roadster six years after the Spyder hit the road. If there was such a big market out there, BRP’s competitors would have picked up on it.

Even after its private-equity remake, BRP remains a company that sells the superfluous. Slick, fast and thrilling balls of fire, but vehicles that are unnecessary nonetheless. BRP might do okay in good times, but the company is bound to be knocked down every time contrary winds pick up.

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