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Polaris Hopes to Go Big With KTM

Both Polaris and KTM have announced a somewhat complex joint relationship that begins with the purchase by Polaris of a 24% interest in KTM’s parent company, KTM Powersports AG. The details are set forth below in the two press releases (the first from KTM, and then from Polaris). A few things stick out.

First, Polaris CEO Tim Tiller states Polaris has a five-year “roadmap to make Polaris the most dominant brand in the powersports industry”. Certainly, this is a tall order, but both of these companies are extremely aggressive and successful. They also arguably already lead two powersports divisions, including snowmobiles (Polaris) and off-road motorcycles (KTM). Furthermore, the companies have virtually no competition with one another at present, but together operate in almost every category of powersports manufacturing. On paper, an extremely good fit! As an example, when it comes to street motorcycles, Polaris has made a good start with cruisers (through its Victory brand), but has no sportbikes or sport machines, at present. Meanwhile, KTM is now introducing some very promising sport machines, but has nothing in the cruiser category.

Interestingly, both Polaris and KTM have hedged their bets. After two years (in 2007), options exist whereby either KTM will buy back its shares from Polaris, or Polaris will become the majority shareholder in KTM (gaining complete control). The two-year “honeymoon” will either result in a marriage (Polaris takes over KTM and absorbs it into a single entity) or a separation (KTM buys back its shares). Certainly, Polaris is planning to complete its acquisition of KTM in 2007 . . . hoping that the two companies can merge successfully.

Here are the two press releases. First, from KTM:

Together, both companies share the full assortment of our sports vehicles and they are the largest manufacturers in the POWER SPORTS segment outside of Japan, with a combined turnover of USD 2.4 billion.

Through this co-operation, KTM can intensify its presence in North America and accelerate its entry into the ATV segment. The KTM POWER SPORTS AG and POLARIS Industries Inc. are entering into a strategic partnership, which is limited to a two-year period during its initial stage. Thereafter both partners can independently decide whether the partnership shall be continued or to what extent the alliance shall be deepened.

Both companies shall continue their business activities as independent entities In the future as well.

In the past business year (2004), POLARIS Industries Inc. achieved a turnover of approx. USD 1.8 billion with 270.000 units sold. As the largest non-Japanese manufacturer of ATV’s, snowmobiles (world market leader), 4×4 utility vehicles and “Cruiser”-Motorcycles under the brand name VICTORY, POLARIS is primarily active in the North American market.

Upon commencement of the partnership, POLARIS Industries Inc. shall purchase a 24% share from the KTM POWER SPORTS AG, which owns 99,77% of the KTM Sportmotorcycles AG.

It is contemplated that Stefan Pierer, managing director of the KTM POWER SPORTS AG, shall be nominated for a seat on the Board of Directors at POLARIS and that Tom Tiller, the chairman of the board (CEO) of POLARIS, be simultaneously nominated for a seat on the KTM supervisory board.

During the first two years, the strategic partnership includes the following segments:

Distribution:
KTM has a strong distribution network in Europe – POLARIS has a similar position in North America. Each company should profit from its respective partner’s strength. In selected European countries (Germany, Czech Republic, Slovakia) the distribution of the POLARIS product range will be handled through KTM.

Product development:
The exchange of know-how and R&D capabilities has the joint objective of accelerating development processes and increasing the rate of innovation for both companies.

Manufacture:

During the initial stage, KTM will supply engines to POLARIS. Also it is planned that KTM will do the final assembling of POLARIS ATVs in Mattighofen for the European market. With production sites on both continents there is the possibility for both companies to hedge against foreign exchange exposure.

With POLARIS and KTM, two partners have found each other who can both point to exceptional economic successes and a dominant position in their respective business sectors. Furthermore, POLARIS and KTM share a very similar culture, in which the focal point is the “passion to ride”.

Two strong brands, established distribution networks and above all the companies’ matching objectives – to become together the dominating power in the global POWER SPORTS business – are the basis of this strategic alliance, from which both companies shall profit.

The second release, from Polaris:

Polaris Industries Inc. (NYSE/PSE:PII) announced today that it will purchase a 24-percent interest in Austrian motorcycle manufacturer KTM Power Sports AG, formerly known as Cross Holding AG, and partner with KTM on several important strategic projects. The goal of the partnership is to strengthen the competitive position of both companies and provide tangible benefits to customers, dealers, suppliers and shareholders.

During the first phase of the partnership, each company will continue to be run separately, but will work together on several specific cooperative projects involving new product development, engine technology sharing, distribution, manufacturing, and purchasing. This initial phase of the partnership will last approximately two years and, in addition to the cooperative projects, will involve the following:

  • Polaris will purchase a 24-percent stake in KTM Power Sports AG from an institutional investor for 66.6 million Euros or approximately $80 million funded from Polaris’ existing bank line of credit arrangement. This represents approximately a 12 percent discount to the market value of the shares purchased reflecting the size of the block of shares purchased and the fact that the shares are thinly traded.

KTM Power Sports AG (formerly known as Cross Holding AG, which is publicly traded on the Vienna Stock Exchange under the symbol CRO), owns and controls KTM Sportmotorcycle AG, a leading European manufacturer of motorcycles with fiscal year 2004 revenue of over 400 million Euros. Over its history, KTM has earned a reputation for providing class-leading, ready-to-race, off-road motorcycles, and recently has entered the on-road motorcycle segment. This transaction, subject to customary closing conditions and regulatory approval, is expected to close during the third quarter of 2005. The actual number of shares purchased and the purchase price are subject to reduction depending upon the number of shares of KTM Power Sports AG outstanding on the closing date.

  • Polaris CEO Tom Tiller is expected to be named to the KTM Supervisory Board after the closing date of the transaction.
  • KTM CEO Stefan Pierer is expected to be named to the Polaris Board of Directors after the closing date of the transaction.

The investment in KTM Power Sports AG is expected to be neutral to calendar year 2005 Polaris consolidated earnings per share and somewhat accretive for the full year 2006. There are no changes in employment anticipated at either company as a result of this announcement.

Additionally, Polaris and KTM Power Sports’ largest shareholder, Cross Industries AG (“Cross”), have entered into option agreements which, under certain conditions in 2007, either Cross may purchase Polaris’ interest in KTM Power Sports AG or, alternatively, Polaris may become the majority shareholder of KTM Power Sports AG. In the latter case, the majority of the purchase price to Cross will be settled in Polaris shares and Cross will become a significant shareholder in the combined Polaris/KTM organization. Cross’ principal shareholders are KTM CEO Stefan Pierer and KTM CFO Rudolf Knünz. The exercise price under both option arrangements are based on market-based, predetermined pricing formulas to be derived from operating results of both companies in 2007.

“I believe this partnership will provide substantial benefits to both Polaris and KTM, and both company’s dealers, employees, suppliers and shareholders for many years to come,” said Tiller. “We have long admired the success of KTM, and are excited about working together to strengthen both companies. Polaris can benefit from KTM’s substantial experience in motorcycles, an outstanding brand, leading technology, and a solid manufacturing presence and dealer network in Europe. Moreover, this relationship complements nearly every aspect of Polaris’ five-year strategic vision, which is a roadmap to make Polaris the most dominant brand in the powersports industry. Further, we believe the two-step approach we have outlined significantly lessens the cultural and execution risk associated with a partnership of this magnitude.”

“In essence, this partnership combines the substantial strength, passion, and success of two industry leaders with very similar, successful 50-year histories, but who do not compete directly today. It is a very natural fit for both of us,” added Tiller.

Mr. Pierer commented, “Polaris and KTM complement each other very well, and we are very excited about our new relationship. By joining forces, we believe we can strengthen KTM’s presence in North America, reduce our production costs, spread our development costs over a larger base, and substantially accelerate our entry into the ATV business. We also look forward to sharing both chassis and engine technology with Polaris. The KTM and Polaris teams should work well together – both companies are driven by innovation, passion, and demand success.”