KKR’s $1.7 Billion Bike Crash Is a Cautionary Tale

(Bloomberg Opinion) — When KKR & Co. acquired Dutch manufacturer Accell Group NV in 2022, the private equity firm must have hoped to cash in on health-conscious consumers parking their cars and hopping on high-priced e-bikes.
Instead, the owner of bike brands such as Lapierre, Haibike and Raleigh is burning cash and drowning in inventory, providing a lesson in underestimating headwinds and overpaying in red-hot markets.
While the bike industry should have a bright future once the current storm abates, KKR faces an uphill slog to earn a return on its €1.6 billion ($1.7 billion) purchase, which came at a 21% premium to the group’s all-time-high stock price.
As with other consumer appliances and equipment, demand for bikes rocketed early in the pandemic, but this growth wasn’t sustainable: Having at first struggled to obtain enough merchandise, retailers ordered too many, leaving corporate cash tied up in inventory.
Interest-rate hikes have compounded these problems by making customers think twice about bike purchases (which nowadays can easily cost four figures), and shops have been forced to offer big discounts to offload excess stock.
The reverberations are still being felt. Japanese bike component giant Shimano Inc.’s bike-related sales plunged almost 30% last year, while UK retailer Halfords Group Plc last month warned on profits, blaming a “challenging and competitive” cycling market.
Several manufacturers, distributors and retailers have gone bust, including Dutch e-bike maker VanMoof BV and Signa Sports United NV, which owned various e-commerce sites. (Signa Sports was part of Austrian tycoon Rene Benko’s ailing retail and property empire and went public via a SPAC in 2021 at a more than $3 billion valuation.)
The lights remain on at Accell, but the cycling group has become quite the headache for KKR: It’s one of three private investments that have seen the biggest decreases in value, according to the PE firm’s annual report, which didn’t quantify the paper loss. There are few comparable publicly traded bike manufacturers, but shares of Taiwan firms Giant Manufacturing Co. and Merida Industry Co. have each declined more than 25% since the Accell takeover was announced.
As was the case for many deals struck during this period of stretched valuations, KKR wrote a large equity check for Accell, amounting to more than 60% of the purchase price.(1)It has since continued to prop up its investment via a €250 million shareholder loan.
Accell certainly needs the money: In addition to a large inventory overhang, the group is facing an expensive recall at its Babboe cargo bike unit, which last month was ordered to suspend sales by Dutch authorities due to safety concerns. Depending on whether the bikes must be repaired or replaced, the bill could run into tens of millions of euros, according to my back-of-the-envelope calculation.
Before the full extent of issues at Babboe became apparent, Moody’s estimated Accell would consume a total of €430 million of cash in 2023 and 2024: The company held only €21 million at the end of September, and its €180 million revolving credit facility is fully drawn.
The group’s €700 million term loan is quoted at around 39 cents on the euro, according to Bloomberg’s BVAL pricing source. However, this senior secured debt doesn’t require refinancing for several more years. Accell’s lenders have hired advisers to help them assess their options, Bloomberg reported earlier this month, after Fitch Ratings called the group’s capital structure “unsustainable” in December.
KKR isn’t sitting on its hands. Accell is trying to better integrate its brands and is shifting production of high-volume models to cheaper sites in Hungary and Turkey. This will require a pair of Dutch factories to be consolidated into just one facility and has caused tensions with trade unions. A German plant has also closed, while job cuts have also been announced at Accell’s UK Raleigh unit.
However, the group also needs to invest to remain competitive with rival conglomerate Pon Holdings BV, which owns bike brands Cannondale, Focus, Kalkhoff and Urban Arrow. There are also lots of new entrants in the e-bike market.
Meanwhile, the continual upheaval in Accell’s upper management ranks has been unsettling. The group’s chairperson, chief executive officer and chief financial officer have all been replaced recently, in some cases after serving only a few months.
Consumers hunting for a new bike should still be able to find a bargain, but the industry’s inventory glut is expected to fade this year. Thule Group AB and MIPS AB, which respectively sell bike carriers and helmet materials, sounded more upbeat during recent calls with analysts.
Long-term trends also remain encouraging, notwithstanding the high rates of theft in big cities. E-bikes now account for more than half of bicycle sales in Germany and on average these sell for almost €3000, or around six times more than a regular bike. Leasing is gaining in popularity to aid affordability, while France is among countries subsidizing purchases.
Nevertheless, transforming KKR’s investment from loss leader to podium winner won’t be easy. Accidents are a hazard when you ride too fast.
More From Bloomberg Opinion:
(1) Teslin Capital Management retained a minority stake as part of the transaction.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.
More stories like this are available on bloomberg.com/opinion
Catch all the Business News , Corporate news , Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
MoreLess