KKR’s $1.7 billion bike crash is a cautionary tale

(Bloomberg Opinion) — When KKR & Co. acquires Dutch manufacturer Accell Group NV in 2022, the private equity firm will surely be hoping to cash in on health-conscious consumers parking their cars and buying high-priced electric bikes.

Instead, owners of bike brands like Lapierre, Haibike and Raleigh are burning cash and drowning in inventory, providing a lesson in underestimating headwinds and overpaying in a red-hot market.

While the bike industry should have a bright future once the current storm subsides, KKR faces an uphill task in reaping the rewards of its €1.6 billion ($1.7 billion) acquisition, which is larger than the group’s The highest level in history represents a 21% premium to the stock price.

Like other consumer appliances and equipment, demand for bikes soared early in the pandemic, but the growth was unsustainable: Retailers initially struggled to get enough goods but ordered too many products, leaving businesses with cash tied up in inventory .

These problems are compounded by rising interest rates that make customers think twice about buying bikes (which can easily now cost four figures), and stores are forced to offer steep discounts to sell off excess inventory.

Its impact is still felt today. Japanese bicycle parts giant Shimano Inc.’s bicycle-related sales plunged nearly 30% last year, while British retailer Halfords Group Plc warned about profits last month, blaming the bicycle market as “challenging and competitive.”

Several manufacturers, distributors and retailers have gone bankrupt, including Dutch e-bike maker VanMoof BV and Signa Sports United NV, which owns multiple e-commerce sites. (Signa Sports is part of Austrian tycoon Rene Benko’s ailing retail and real estate empire and went public via a SPAC in 2021 with a valuation of more than $3 billion.)

Accell’s lights are still on, but the bike group has become quite a headache for KKR: It’s one of three private investments that have fallen the most in value, according to the private equity firm’s annual report, which did not quantify paper losses. There are few comparable publicly traded bicycle makers, but shares of Taiwanese companies Giant Manufacturing Co. and Merida Industry Co. have each fallen more than 25% since the Accell acquisition was announced.

Like many deals struck during this period of overvaluation, KKR wrote Accell a large equity check, amounting to more than 60% of the purchase price. (1) It has since continued to support its investments through the euro. 250 million shareholder loan.

Accell certainly needs the money: as well as a massive inventory backlog, the group is facing a costly recall of its Babboe cargo bike division, which was ordered to suspend sales by Dutch authorities last month over safety concerns. By my rough calculation, this could cost tens of millions of euros depending on whether the bike needs repair or replacement.

Before Babboe’s problems became fully apparent, Moody’s estimated that Accell would burn through a total of €430 million in cash in 2023 and 2024: as of the end of September, the company held just €21 million and its €180 million revolving credit facility was fully draw.

The group’s €700 million term loan was quoted at around 39 cents euros, according to Bloomberg’s BVAL pricing source. However, this senior secured debt does not require refinancing for several more years. Earlier this month, Bloomberg reported that Accell’s lenders had hired advisers to help them assess their options after Fitch Ratings in December called the group’s capital structure “unsustainable.”

KKR are not sitting idly by. Accell is working to better integrate its brands and move production of high-volume models to cheaper factories in Hungary and Türkiye. This would require merging two Dutch plants into one and lead to tensions with unions. A German factory has also closed, and Accell has announced layoffs at its Raleigh, U.K., plant.

However, the group also needs to invest to stay competitive with rival Pon Holdings BV, which owns bicycle brands Cannondale, Focus, Kalkhoff and Urban Arrow. There are also many new entrants into the e-bike market.

Meanwhile, continued turmoil among Accell’s top executives is also troubling. The group’s chairman, chief executive and chief financial officer have all been replaced recently, with some serving for only a few months.

Consumers looking for new bikes should still be able to find bargains, but the industry’s inventory glut is expected to disappear this year. Thule Group AB and MIPS AB, which sell bicycle frames and helmet materials respectively, sounded more optimistic in recent calls with analysts.

Although theft rates are high in major cities, the long-term trends remain encouraging. At present, electric bicycles account for more than half of German bicycle sales, with an average selling price of nearly 3,000 euros, about six times that of ordinary bicycles. Renting is increasingly popular to improve affordability, and France is one of the countries that subsidizes buying.

However, turning KKR’s investment from loss leader to podium winner isn’t easy. When you ride too fast, there is a risk of an accident.

More views from Bloomberg:

(1) As part of the transaction, Teslin Capital Management retains a minority stake.

This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering European industrial companies. Previously, he was a reporter for the Financial Times.

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