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KTM ends possible union with Polaris – August 14, 2006

August 14, 2006
Filed under Features

Obtaining a larger share of Austria’s KTM Power Sports AG, majority owner of motorcycle producer KTM Sportmotorcycles AG, is no longer an option for Minnesota-based Polaris Industries, Inc.
Polaris, through its Austrian subsidiary (Polaris Beteiligungsverwaltungs GmbH) purchased 24.9 percent of the capital stock of KTM Power Sports in July 2005 for about Euro 62.6 million ($75.5 million). At the time, Polaris and KTM Power Sports’ largest shareholder, Cross Industries AG, entered into an option agreement that allowed, under certain conditions in 2007, Polaris to purchase Cross’ majority interest in KTM Sportmotorcycles or, alternatively, Cross to re-purchase Polaris’ 24.9 percent interest.
Now, while Polaris and KTM will continue their strategic partnership at an operational and technical level, Cross principals Stefan Pierer and Rudolf Knuenz say they no longer want to sell a larger share of the motorcycle manufacturer.
“Rudolf Knuenz and I have recently informed Polaris of our intention not to sell Cross’ interest in KTM to Polaris. We wish to remain in control of KTM and for KTM to remain an independent company,” Pierer said, adding that he and Knuenz have been pleased with the results of the first phase of the strategic partnership and look forward to continuing the relationship.
“The reasons for the decision are internal to their company,” said Polaris CEO Tom Tiller. “Nothing has changed with the agreement. They just changed their minds regarding that particular aspect, which they were free to do.”
THE PARTNERSHIP
The first phase of the partnership called for each company to be run independently, but to work on several specific cooperative projects. So far, the companies have:

  • entered into a long-term exclusive engine supply agreement for ATV applications,
  • positioned KTM as Polaris’ distributor in Germany,
  • found supply chain efficiencies and reviewed financing opportunities, and
  • worked on co-developed projects, as seen with the recent introduction of a KTM-powered Polaris Outlaw 525 sport quad (see page 20.)
    In 2007, two years after the start of the partnership, the two parties would have evaluated the deal. Polaris would have had the option to purchase a majority of KTM, and Cross would have had the option to re-purchase the stock from Polaris.
    If Polaris decided to buy additional KTM shares, the majority of the purchase price would have been in Polaris stock, through which Cross would have become a significant shareholder in a combined Polaris/KTM organization. The exercise prices under both options would have been arranged by market-based, predetermined pricing formulas to be derived from operating results of both companies in 2007.
    “From a Polaris management standpoint, we are clearly disappointed,” Polaris COO Bennett Morgan told Powersports Business. “The synergies between these two companies are awesome. And, while we’re getting a number of synergies as the partnership is structured today, we would have liked the opportunity to bring the companies together.”
    “When we structured Polaris’ path toward complete ownership of KTM as a two-staged process, we recognized that this was a possible outcome,” Tiller said. “We discussed three potential scenarios that could have occurred at the end of the two-year period. The first option was for KTM to buy back the Polaris shares and remain an independent company; the second option was for Polaris to acquire the KTM shares and effectively merge the two companies; and the final option was for Polaris to continue to own the KTM shares at the 25 percent level.”
    Tiller said he feels KTM’s decision “wasn’t really based on numbers.”
    “Our teams have worked well together over the past year,” he said. “The strategic partnership has accomplished a tremendous amount so far and achieved nearly all our goals during the first 12 months of its existence.
    “It’s like two people getting married. We’re about one year into our engagement, and they decided they didn’t want to get married. It’s not a lot more complicated than that.”
    THE FUTURE
    Going forward, Polaris will continue to own the 24.9 percent share of KTM Sportmotorcycle — at least until Cross has the option to buy back Polaris’ interest. Until then, Polaris will continue to recognize 24.9 percent of KTM’s net profit as part of the company’s Income From Manufacturing Affiliates on the balance sheet, as well as continue to record investment on the balance sheet as part of Investment In Manufacturing Affiliates.
    Tiller also will remain on the KTM Supervisory Board while Pierer will continue with the Polaris Board of Directors.
    “The long-term potential of this partnership remains positive,” Tiller said. “The partnership will continue, and additional projects are possible going forward.”
    “One of the reasons we liked this deal was the opportunity to benefit from KTM’s distribution in Europe, particularly with regard to Victory motorcycles,” Tiller said. “That is probably,
    strategically, the biggest place where we could benefit from that. They probably weren’t going to help us too much with snowmobile distribution, and probably to a more limited amount with ATV. The big thing was with Victory, they could have been quite helpful in taking Victory to Europe.”
    “Most of the projects are going to continue, and some of them are even being expanded,” Morgan said. “These guys (Pierer and Knuenz), even though they don’t want to give up their ability to continue to run KTM independently and control the strategic direction of the company, they see just like we do the tremendous benefits of working together.”
    Polaris expects year-end sales to be down 3 percent to 5 percent. Once at a 52-week high of $56.39, shares of Polaris fell $1.50, or 4 percent, to $37.15 the day of the July 28 announcement. psb

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