After months of questions and uncertainty, Pacific Safety Products hopes that a merger with Zuni Holdings will help it recover from near collapse.
It has been an eventful year for the struggling body-armour manufacturer. The Ottawa-based company saw both profit and revenue plummet in four consecutive quarters with annual sales down 15 per cent from where they were last year, according to the company’s annual report.
Riddled with bank debts, PSP was also forced to sell its Headborne systems division to Revision Eyewear, a company that nearly bought PSP back in June, until the sale was blocked by key PSP investors.
While both sides are optimistic that this deal will resolve the financial issues at hand, the larger problem lies in the question of whether or not PSP still has a market for its products.
The company that had held a virtual monopoly of the body armour industry in Canada just a year earlier was on the verge of folding. In a few short months PSP laid off nearly a quarter of its workforce and its manufacturing facility in Tennessee that had been opened only two years prior was in jeopardy of being closed.
After months of disappointing numbers, PSP’s entire board of directors and CEO resigned in early September. Only a few weeks into his new job, current CEO Doug Lucky says that the merger with Zuni is exactly what the company needs to revive itself.
“Pacific Safety Products has a very good product and very committed work force, yet it also has a shortage of capital required for us to appropriately position the company in the market against the opportunities available to us,” says Lucky.
“Zuni is a company with cash on its balance sheet and the opportunity exists to create value with that cash combined with the opportunity within PSP.”
Although Zuni representatives were unavailable for comment, a press release issued by the company echoed similar sentiments stating, “The board of directors of Zuni believes this transaction optimizes the value of the remaining assets of the company.”
Zuni shareholders benefit
Following the merger, which will be finalized in late December, the boards of both companies will remain intact and continue to function in the same manner as they did prior to the union.
Shares from both companies will be combined to form a larger pool; an act the Lucky says will benefit Zuni shareholders who will make more profit on their investment.
“Instead of getting a 0.05 per cent return of cash sitting in the bank, Zuni shareholders will instead get a real return through value creation following the merger.”
We will continue to compete on the basis of our product quality, our design competency and the value equation associated with our product.
While both sides are optimistic that this deal will resolve the financial issues at hand, the larger problem lies in the question of whether or not PSP still has a market for its products.
As a body armour manufacturer, PSP will always have customers in both emergency medical services and police forces.
During the past decade, PSP has won several, multi-million dollar contracts from the Canadian Department of National Defence for both fragmentation protective vests and chemical warfare protective coveralls, helping to make it the largest body armour manufacturer in Canada.
When PSP first ran into trouble in late 2008, company reports cited tighter government spending coupled with low product demand as the source of its problems. In the middle of a global recession, governments made drastic budget cuts, leaving companies like PSP to suffer the financial pain.
While the economic environment improved from where they were last year, there is still an air of economic uncertainty.
Wary of military cuts
One of the casualties in Canada is military spending. “As part of measures to restrain the growth in overall government spending and return to budget balance in the medium term, the Government will slow the rate of previously planned growth in the National Defence budget” said the 2010 budget document.
National Defence’s budget will be cut by $525 million in 2012–13 and $1 billion annually beginning in 2013–14
The Canadian government has stated the National Defence is a top priority, but if spending doesn’t increase for another three to four years, the question becomes whether or not PSP can survive until its services are needed again.
If anything, the Zuni merger has bought PSP time.
Lucky maintains that product quality is what separates PSP from the other companies and is what will ultimately help it to persevere.
“We will continue to compete on the basis of our product quality, our design competency and the value equation associated with our product.”
For now PSP will play the waiting game, and only time will tell if product quality is enough to keep the company afloat.