08/22/2013 04:39 EDT | Updated 10/22/2013 05:12 EDT

Dorel to assemble bikes after buying Brazil's largest bicycle maker

MONTREAL - Dorel Industries will manufacture bikes in-house for the first time since it entered the business nine years ago, after acquiring a majority stake in a Caloi, a South American bicycle manufacturer.

A factory owned by Caloi in northern Brazil will assemble Dorel's Cannondale, Schwinn, Mongoose and GT bike brands for the Brazilian and export markets.

"It's a major foothold into South America," chief executive Martin Schwartz said Thursday.

"The fact that they've got a fairly large, fairly efficient factory in Brazil gives us a lot of latitude to do a lot of different things."

Schwartz wouldn't provide the exact purchase price for the 70-per cent stake, but some estimates suggested the acquisition will cost about $100 million, based on typical margins for such a business. Until now, Dorel (TSX:DII.B) has relied on contracts with manufacturers in China and Taiwan to make its various bicycle lines.

Caloi's manufacturing plant in Manaus, Brazil produces more than 750,000 bikes a year and could assemble at least 15 per cent of Dorel's global product line, he said.

While Brazilian labour costs are on par, or even higher than, in Asia, the decision to manufacture in South America's largest country will allow Dorel to avoid hefty import duties, Schwartz said. It could also pave the way for exports to Europe by bypassing high duties imposed on goods made in Asia.

Schwartz said the bikes will not be shipped to the U.S. market, but that producing parts and assembling in Brazil will allow the company to benefit from lower costs and duties imposed on imports to Brazil.

Dorel said Caloi is Latin America's largest bicycle brand and has an estimated market share in Brazil of more than 40 per cent.

Founded in 1898, Caloi makes a full range of bicycles from high-performance to children's models, including mountain bikes, urban, recreational and road bikes.

Leon Aghazaria of National Bank Financial says the deal is notable because Dorel will establish its own production hub and allow the company to more easily introduce its popular brands into the growing Brazilian market.

"I think it's a good fit for them," he said in an interview.

"There's a noticeable shift right now in Brazil where the market is moving more upscale."

The analyst added he doesn't think moving into production marks a shift in strategy for Dorel, but instead will be a cheaper way to boost sales while avoiding costly duties.

"If you want to sell bikes in Brazil you have to manufacture them in Brazil. That's just the nature of the beast there," he said.

Caloi employs 900 people at various locations, including the Manaus plant, its head office in Sao Paulo and a technology and logistics centre in Atibaia.

Dorel said Caloi will immediately boost its profits and push its annual bike revenues above US$1 billion, solidifying its position as a Top 5 bike company.

Caloi's existing owners will own the remaining 30 per cent but Dorel has an option to purchase that in about three years. Eduardo Musa will become the bicycle segment's Brazil president. The company's sales in 2012 were US$111.6 million, a 22 per cent increase from the previous year, and growing this year.

Dorel is also in the process of setting up distribution in Chile, Peru, Colombia for direct imports from Asia. In South America, the company has already established a juvenile products division in Brazil in 2009 for its line of children's car seats.

The company is also a partner for a line of retail stores in Peru and Chile which helped grow Dorel's sales in Latin America by 35 per cent last quarter.

Dorel manufacturers a number of children's products under the Safety 1st, Quinny, Cosco, Maxi-Cosi and Bebe Confort brands, while its bikes and related products include brands such as Cannondale, Schwinn, GT, Mongoose, IronHorse and Sugoi. It has annual sales of US$2.5 billion and employs 5,400 people in facilities located in 24 four countries.

On the Toronto Stock Exchange, Dorel's shares gained 78 cents to close at $35.09.