Team Sports Gear-Makers Ripe for Mergers and Acquisitions
Investors have long been dismissive of team sporting goods makers, beholden to the narrative that youth sports participation is in long-term decline and remembering past failures of gear makers to power growth for mainstream buyers, like Nike with Bauer and Adidas with CCM. But one of investment banking’s most experienced consumer products mergers and acquisitions executives sees a confluence of factors reversing negative trends, signaling it might be time for private equity to get in the game.
“Natural demand for team sports is increasing, the excitement around the category is increasing, the money in the category is increasing,” Joe Pellegrini, managing director and senior advisor of investment bank R.W. Baird, said in a phone call. Team sporting goods makers “are far more profitable than they have ever been and far more stable than ever, [and] the professionalism of company management teams has increased dramatically.”
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Based on data compiled by Pellegrini’s group at Baird, team sports have rebounded quickly post-pandemic, with the top five seeing participation rates at 107% of their pre-COVID levels compared to a slight decline in individual sports rates. Youth hours spent weekly on team sports is up to 16.6 on average, from 13.6 pre-pandemic. In the past eight years, 3 million more American youths are playing the top six team sports, with particular growth in women’s participation, according to the investment bank. Other well-known trends, like the rise in NIL opportunities, are only reinforcing youth desire to play team sports.
A key piece to the anti-gear investment thesis is that equipment for team sports—such as helmets, gloves and hockey sticks—presents a high barrier to entry because of the sophistication required to produce it, while their necessity offers a predictable market. “The discipline to run an equipment company is very different from an apparel or footwear company,” said Pellegrini. “Your performance on the field matters in a much more magnified way on the baseball bat, hockey stick or shoulder pads than a pair of sneakers.”
Pellegrini says the next 12 to 18 months should bring opportunities for private equity and high net worth investors to enter team sporting goods makers at attractive prices.
That’s probably a good bet, given he’s been focused on sports and investing for most of the past four decades. A South Boston native who played at Harvard before becoming a 1980 Olympic hopeful in the discus, Pellegrini made the 1982 Jets after a five-year absence from football. Over his five-year NFL career, he balanced life as a starting center and rooming with paparazzi-draw Mark Gastineau with going to school to earn his MBA at Columbia. In the time since, he has helped complete more than 200 M&A deals, including early investments into Oakley, Whole Foods and Columbia Sportwear and, more recently, Mitchell and Ness’ purchase by a Fanatics-led group and LeBron James’ investment in Canyon Bikes.
Team sports gear-makers have the chance to offer strong positive cash flow and income along with long-term growth from the sports tailwind, he says. The segment may not produce a lot of fast-growing public companies—attempting to grow equipment makers too quickly has been a typical misstep in the past—but they should be the kind of target that increasing numbers of sports-focused investment funds will want. “Like Wayne Gretzky, I’m trying to skate to where the puck is going,” Pellegrini said. “I think private equity is going to discover this and want to be a part of it.”
In a white paper Baird published last week, Pellegrini suggests seven companies in particular are leaders to pursue, if the opportunity arises. They range from businesses with more than $500 million in revenue, like Wilson, TaylorMade and Rawlings, to mid-sized options like Bauer, CCM and Riddell, and one small business—Marucci, a baseball-focused company with less than $250 million in sales.
Most of the companies have been around in some form for more than 90 years, and all compare favorably to Nike and Adidas on brand and customer satisfaction scores, according to the paper. That group should be seen as the favorites to be consolidators in their sport niche or closely related sectors. The best dozen or so targets for the consolidators, says Baird, include Franklin Sports, Epoch Lacrosse, Shock Doctor and Diamond Kinetics.
Without citing specific companies, the Baird report says financial metrics for team sports’ top companies have been on the uptick; gross margins these days are around 40%, up from 30% a decade ago, while earnings before interest, taxes, depreciation and amortization (EBITDA, a metric considered to show the health of a core business) are now in the double digits, up from single digits last decade.
“These are iconic, almost irreplaceable assets,” Pellegrini said. “Other sectors like outdoor sports—bikes—and fitness, like stationary cycles, have gotten oversaturated. Team sports hasn’t.”
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