By Lisa Johnston
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D&M Holdings will buy publicly held Boston Acoustics for around $76 million in cash, or $17.50 per share, under a definitive merger agreement expected to close by Aug. 31 after expected shareholder approval.
The per-share bid represents an 8 percent premium over Boston's $16.21 closing share price on the day preceding the June 8 acquisition announcement.
The acquisition includes the high-end Snell home speaker brand owned by Boston Acoustics, the maker and marketer of home and car audio speakers, an extensive custom-install speaker line, car amplifiers and a small but growing selection of home-A/V electronics.
The acquisition of the Peabody, Mass., company will give D&M a firm foothold in the home and custom-speaker markets and in the OEM and after-market autosound businesses, said D&M's president/COO Vic Pacor.
In turn, the always-profitable Boston Acoustics can get a lot more profitable, Pacor said. D&M's priority is to "immediately engage" its overseas sales, marketing and warehousing infrastructure on Boston's behalf to boost sales in Europe, Asia/Pacific, China and Japan, Pacor explained.
Both Boston and D&M, he added, will benefit from their combined ability to "go to specialty A/V retailers and custom installers with entire predetermined solutions" that include electronics and speakers.
Pacor also cited the potential for D&M's Denon and Marantz brands to enter the OEM autosound market and for its McIntosh brand to expand its tiny OEM presence. He also sees opportunity for Snell in the OEM autosound market.
D&M's other brands are ReplayTV, Rio and Escient.
The acquisition does not herald a major cutback in Boston's warehousing or back-office functions to eliminate duplication, Pacor stressed. "Boston Acoustics is not a company in trouble," he said. "I don't see that we have to do anything substantial to change the nature, structure or location of the company." Instead, the acquisition will help Boston deliver more back-office support, and it could help relieve strain on D&M's warehousing and service infrastructure as D&M continues to grow, he noted.
Citing Boston's strong position, Pacor said top Boston personnel will remain with the company. Andy Kotsatos will remain chairman, and Moses Gabbay will remain president/CEO. D&M also hopes to keep senior staff "well motivated" so they'll stay on, Pacor added.
Although Boston is profitable, Kotsatos decided to sell the company “to pass the baton in a way that gives the company the opportunity to grow further and faster … for longer than he will be with it,” Pacor said. Kotsatos, who co-founded the company in 1979, enabled Boston to “weather transitions and difficulties” in recent years while always remaining profitable, Pacor said.
Kotsatos, his wife and Kotsatos trusts own 33.2 percent of Boston's voting stock, and investor Daeg Partners has pledged its 4.8 percent voting share toward the purchase.
Restructuring and downsizing in recent years helped Boston stay in the black despite sales that shrank from $117.7 million in fiscal 2001 to only $52.6 million in fiscal 2004, which ended March 2004. Pacor attributed the vast majority of that decline to Boston's disentanglement from the high-volume, low-profit multimedia speaker business. In recent years, net income ranged from a high of $6.6 million in fiscal 2000 to $3.9 million in fiscal 2001 and 2002, $1.8 million in fiscal 2003, and $1.9 million in fiscal 2004.
For the first nine months of fiscal 2005, sales were up 4 percent to $42.8 million, and net income was up 79 percent to $2.5 million. In the third quarter, sales were up 16 percent because of new product introductions in core product categories such as home and custom-installed audio. The company also cited gains in the OEM automotive business through its partnership with Visteon. The company also achieved a 98 percent increase in operating income for the quarter.
D&M has been looking for a major speaker brand for some time to complement its product portfolio, which is focused mainly on home audio and video equipment but includes Rio-brand MP3 portables.
D&M is no stranger to home speakers, however. Its Marantz unit markets speakers in the U.S. for Mordaunt Short but has a small share, and McIntosh's speaker volume is mainly in the “super-premium category” with relatively limited volume, Pacor said. Boston, on the other hand, is a major speaker brand, and its position in home speakers is akin to Denon's in home audio electronics. Boston has “a potential for high market share in the sweet spot of the premium market with high volume, high ASPs and high features,” he said.
Although D&M gains significant presence in car audio with Boston's purchase, D&M is no stranger to car audio, either. Only D&M's McIntosh brand, however, offers OEM and after-market car audio, and the brand's share is small.
Boston, Pacor continued, is well positioned in the aftermarket segments that continue to rise despite falling overall sales. That segment is high-performance speakers, subwoofers and amps. As a result, Boston's aftermarket sales have been rising in recent years, he said.
Although D&M's brands are well entrenched in home audio electronics, D&M said it supports Boston's diversification into electronics such as A/V receivers, home theater systems and premium radios. “We don't disagree with the Boston road map,” Pacor said, “and we can support their electronics efforts … with complementary brands or by developing unique products.” Boston's first distributed-audio system, he added, is “imminent.”
D&M has been acquiring businesses selling to specialty-A/V and custom-installation dealers since its first two purchases — of Denon and Marantz — in 2002.
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