Mergers & Acquisitions and Deals and Klipsch and Manufacturing & Technology and Technology

Sleepy Klipsch buyer out to make some noise

June 4, 2011

The company that recently bought the high-end audio firm Klipsch Group hopes to use the $167 million deal to win over Wall Street.

Hauppauge, N.Y.-based Audiovox Corp. has no analysts following its stock, even after adding the 65-year-old Klipsch brand to its portfolio in March.

Fred Klipsch Klipsch

Indianapolis-based Klipsch Group saw sales of $162 million and record profit of nearly $23 million in the fiscal year that ended in June 2010. Audiovox expects it to push the combined company’s sales up 30 percent, to $730 million this year.

CEO Patrick Lavelle said investor reaction to the Klipsch deal has been “very positive,” but he acknowledged, “the proof is in the numbers.”

A lot of investors are waiting to see whether the figures Audiovox forecast during a May conference call materialize, he said.

Audiovox, a consumer electronics company, embarked on a makeover in 2005 with the sale of its cellular business. The idea was to get away from commodity electronics and into higher-margin businesses.

Audiovox acquired businesses from two Indianapolis-area companies, Thomson Consumer Electronics and Technuity, in 2007.

Thomson’s accessories and audio-visual businesses, purchased in separate transactions for a total of $69 million, gave Audiovox the RCA brand in everything except televisions.

Technuity, for which Audiovox paid $20.4 million, added Energizer rechargeable batteries.

Audiovox shares, which hit a 52-week high of $8.98 late last year, have yet to get a spark from the Klipsch deal, which was unveiled in January. Shares now trade for around $7.40.

Klipsch is the largest acquisition to date, and it adds a high-end, specialty product line to the Audiovox portfolio for the first time.

Klipsch Group, founded by acoustic engineer Paul Klipsch in 1946, has its roots in high-quality speakers for the home and movie theaters, but has expanded over the years into computer speakers, iPod docks and earphones.

“The biggest challenge facing Audiovox ... is going to be their ability to create new consumer demand in ways that are more creative and exceed what Klipsch could do on their own,” said Jerry Del Colliano, owner of Hometheaterreview.com in Beverly Hills, Calif.

Klipsch has a big presence in Best Buy stores, but Del Colliano said other speaker companies are earning high margins on direct sales, which they drive through advertising with Google and in publications like his.

“Consumers want it all and can get it from places more diverse than Best Buy—most notably the Internet,” he said.

Lavelle said Audiovox will keep Klipsch’s marketing plan, which includes a sponsorship deal with national concert promoter and venue operator LiveNation.

klipsch audiovoxAudiovox also hopes to help Klipsch build on its success in commercial sales. Half the movie theaters built in the last decade use Klipsch speakers, and the company has a deal to supply Jimmy Buffett’s Margaritaville hotels, he said.

Jimmy Baker, a senior analyst at B. Riley and Co. in Los Angeles, sat down with Audiovox executives at a recent investor conference hosted by his firm. He could see the benefits of the Klipsch acquisition but said Wall Street would hesitate to initiate coverage of the stock because there aren’t many small companies like Audiovox in consumer electronics.

Directed Electronics, a similar company in Vista, Calif., infamously nose-dived after its 2006 acquisition of Polk Audio.

“There’s a relatively visible history of mobile-electronics guys not executing acquisitions,” Baker said.

Lavelle said Audiovox is in a much stronger financial position than Directed Electronics. Audiovox didn’t take on debt for any of its acquisitions until Klipsch.

Fred Klipsch, the majority shareholder and CEO the past 22 years, said he decided to sell because a larger company would have the resources to shepherd Klipsch through its next stage of growth.

He said he sold to Audiovox, in part, because the company would leave his management team and headquarters in Indianapolis. Klipsch has 220 employees worldwide, including about 130 here.

Audiovox made good on that promise with the June 1 appointment of Paul Jacobs, Klipsch chief operating officer, as CEO. Fred Klipsch, 69, is expected to join the Audiovox board in July.

Jacobs, 53, is a music lover who started with the company in 1991 as a sales rep and rose through the management chain.

“We’re very happy management is all staying and very motivated,” Lavelle said.

Crunch time

The recession threw Klipsch Group off its growth trajectory, but Fred Klipsch said the company recovered through a “textbook” case of sound management.

Klipsch had its best year in the fiscal year that ended in June 2008, when sales reached $224 million and profit was $4 million.

The record year was the result of a spate of acquisitions, beginning in 2005 with the Jamo brand in Denmark, that gave Klipsch a strong presence in international markets, Klipsch said.

Then, in the following year, sales dove 24 percent to $169 million and Klipsch posted a loss of $18 million.

After reviewing Klipsch’s 2009 financials, auditors expressed doubt about the company’s ability to remain a “going concern” because $32 million in debt was coming due in April 2010, a filing Audiovox made with the Securities and Exchange Commission last month shows.

Klipsch said the auditors’ red flag was a mere technicality reflecting that debt was due within the 12-month period, not the company’s ability to manage it. Klipsch Group reduced its work force, eliminated some products, and found other efficiencies that put the company in line with the new economic reality, he said.

The savings went to eliminating roughly $28 million in bank debt, Klipsch said, and sales started to grow again in 2010.

“It was almost like fiscal ’09 didn’t happen,” Klipsch said.

Sales for the 2010 fiscal year were still lower, $162 million, but so were expenses. Profit hit $22.8 million.

Klipsch said the recession didn’t force him to sell the company, but he acknowledged that it created a whole new environment.

“The economy still hasn’t recovered,” he said.

As part of the $167 million cash purchase, Audiovox paid off $11 million in outstanding debt, which included $9 million in loans from insiders, and redeemed 1.45 million shares of preferred stock for $69 million.

Audiovox will have the resources to continue, even if economic recovery is another year or two away, Klipsch said.

“There is significant opportunity for this company to continue growing,” he said.•

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