Will KKR Take Harley-Davidson for a Ride?

In a way, speculation that Harley-Davidson (HOG) might be the object of a leveraged buyout is the best news the company has received in seven quarters of below-expectations results. If the speculation is true, a buyout would show that at least someone -- Kohlberg Kravis Roberts, also known as KKR, according to the rumors -- believes Harley's fortunes have bottomed out and the company still has a chance to recover. Investors reacted with favor to the notion, pushing the stock up more than 8% in today's trading.

What could KKR be seeing that the market didn't? After all, Harley reported its first quarterly loss in 16 years for the fourth quarter of 2009 due to continued restructuring and slack sales. New U.S. Harley registrations have fallen from 251,400 in 2007 to 162,000 in 2009.

But from KKR's perspective, Harley also might be a company that's finally taking the necessary steps to streamline its operations. Harley is closing a number of manufacturing and test facilities around the country, including some in its home state of Wisconsin. It has dumped minor brands MV Augusta and Buell. It has taken a huge hit in its financial services sector, absorbing bad loans and dealing with tight credit, while still managing to finance almost half of the Harleys bought in 2009. The company closed 28 of the weakest dealerships in 2009 and reduced the number of unsold units sitting on the showroom floor.

Will Bikers Rebel?

And most important, the value of the Harley-Davidson brand hasn't been too badly tarnished, although the low value of used bikes is a continuing concern. For a stock that sold for almost $75 per share less than four years ago, the roughly $27-per-share might just tempt some company to take Harley for a ride.

What will motorcyclists think? The last time the company was in hands other than the current ownership, it was owned by AMF, a company best known, at the time, for bowling equipment. It cut costs and quality, and virtually drove the brand into a wall. Harley was finally rescued by a group including descendants of the founders, and it took them years to restore the reputation of a brand that had become as well-known for leaking oil as highway attitude.

If this deal is for real, KKR will need to take measures to reassure the Harley nation that the brand's quality and aesthetics will remain unscathed. The most tempting cost-cutting measure, off-shoring, would be hard pill for devotees to swallow.