David George-Cosh

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Dorel Industries Inc. is selling its sports division to Dutch transportation conglomerate Pon Holdings B.V. for US$810 million as the Montreal-based company looks to reduce its debt load.

The sale comes roughly six months after Cerberus Capital Management LP withdrew its plans to take Dorel private for $437 million after failing to receive enough shareholder support to complete the deal.

Demand for bicycles and bike parts has soared since the onset of the COVID-19 pandemic as more people take up cycling to improve their fitness. Revenue in Dorel's sports division rose 13.8 per cent in 2020 to $265.3 million, representing the biggest segment for the toy-and-bike maker.

"We've been in the bicycle business for 17 years and we feel it's still got a long way to go but we want to let someone else do it, and concentrate on their remaining two businesses which are still very good businesses with a lot of potential for growth," said Martin Schwartz, Dorel’s president and chief executive officer, in an interview Tuesday.

The company expects the sale to Pon Holdings to close before the end of the first quarter of 2022. In addition to paying down debt, Dorel said it aims to use proceeds from the sale to return capital to shareholders and for general corporate purposes. After accounting for closing adjustments, Dorel said it anticipates US$735 million in net proceeds from the deal.

"Let's take a look at our home business that we can still grow organically," Schwartz said. "There's still a big demand for home furnishing products and also we'll probably take a look at one or two tuck-in acquisitions to help us grow maybe in other areas of the world."

The deal will also see Pon Holdings acquire several high-profile cycling brands such as Schwinn, Cannondale and GT. Once the deal closes, Pon said in a separate statement that it expects its annual bike sales will reach 2.5 billion euros ($3.59 billion) from 1.5 billion euros in 2020, making it one of the largest bicycle makers in the world.

Meanwhile, Dorel said challenges in the container freight industry, as well as pandemic-related challenges including labour shortages, will force the company to reduce its outlook for its Home and Juvenile divisions. However, it did not provide details about the magnitude of those revisions. Dorel is scheduled to release quarterly results on Nov. 5.

"We still have a lot of inventory on the water," Schwartz said. "There has been a shortage of supply because of COVID in certain areas of China and certain countries. That seems to be abating right now so hopefully we'll have some inventory for the holiday season or some excess."

TD Securities Analyst Derek Lessard boosted his 12-month target price on Dorel's stock to $46 per share from $15.50 following the deal's announcement, while upgrading his recommendation to a "buy" from a "hold."

Lessard said in a report to clients Tuesday that Dorel's valuation could grow once supply chain pressures ease and the company is able to deliver more consistent earnings.