Cedar Electronics, formed through the strategic merger of Escort, Inc. and Cobra Electronics Corp., is the world’s leading manufacturer of automotive radar detectors and a market leader in CB radios, dash-cams and marine radios.
Despite holding the largest market share in premium radar detectors, Escort had introduced only one new detector product in the five years before we bought the company in 2013. Instead, the company had tried, and failed, to diversify out of radar detectors into general consumer electronics and was at risk of losing its core customer base. Cobra, a maker of radar detectors, CB radios, dash cams and marine radios, struggled with weak management and poor product selection. A micro-cap public company, Cobra was only marginally profitable and finding it increasingly difficult to stand out in the crowded field of consumer electronics.
Monomoy was introduced to Escort after a two-year effort by Escort’s owners to find an interested buyer. In 2013, we provided an exit for Escort’s owners and a solution for the Escort management team through a cash purchase, with the possibility of further payments to the sellers if the company performed well in the future.
We identified Cobra as a good fit with Escort shortly after completing the Escort acquisition and made an offer to buy the company in early 2014 for a modest premium over its then-current stock price. After soliciting other buyers, the Cobra Board of Directors accepted our offer, and we took the company private in late 2014.
The Investment Thesis
Both Escort and Cobra passed the four key investment questions that Monomoy asks of any business we are considering buying (see sidebar).
At the time of our purchase, Escort was the market leader in the premium segment of the radar detector business and generated high gross margins despite a series of poor product and pricing decisions. We saw an opportunity to work with Escort's management to focus the company on its core customer, improve cash flow and profitability through the Monomoy Production System, and introduce new products. We also identified enormous potential in reaching even a small portion of the 99% of American drivers who have never purchased a radar detector.
At Cobra, we recognized that stronger management, better product mix and pricing, and improved cash management could create a successful, sustainable business. Additionally, Cobra had long enjoyed the largest market share in value-priced radar detectors and a strong presence in big box retailers. We believed that Cobra could utilize Escort’s superior radar detection technology to substantially grow the sale of value-priced detectors while Escort could tap Cobra’s sales channels to sell additional premium detectors into the mass retail market.
In 2014 and early 2015, we operated the two business separately so we could focus on restructuring Cobra and expanding Escort’s radar detector offerings. At Cobra, we promptly created a corporate structure appropriate for a profitable, private company, and elevated an incumbent Cobra executive to lead the business unit. We then worked with management to eliminate unprofitable product lines, sell off obsolete inventory, renegotiate vendor terms, and rationalize prices on several products. Through these preliminary initiatives, we were able to generate substantial free cash flow and significantly improve EBITDA within the first nine months of Monomoy ownership.
At Escort, we worked with management to eliminate the research and development spend on non-core consumer electronics and redirect development and marketing resources to Escort’s core detector products. After years without introducing new radar detectors, Escort brought two new radar detectors to market in 2014, and five in 2015.
By the middle of 2015, the time was right to merge the two companies and form Cedar Electronics as a holding company to operate the Escort and Cobra brands. With a strong management team, including the executive who led the turnaround at Cobra, the combined entity realized substantial additional synergies in the merger and further improvements from lean manufacturing initiatives and bold new licensing agreements.
The bottom line? EBITDA at the combined companies nearly doubled in 2015, and the merger created a well-capitalized and diversified consumer electronics business that should remain highly profitable. The Cedar management team now runs a vibrant, growing collection of consumer electronics brands with industry-leading products and profit margins. The Company added WaspCam, an exciting, value-priced action camera, to its product line in early 2016. Monomoy expects to explore additional product line growth and possible add-on acquisitions for the Cedar platform in 2016 and 2017.