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Collective Brands To Be Broken Up In $1.32 Billion Deal

05/01/2012 | 05:46pm US/Eastern
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--Wolverine World Wide, two private-equity firms agree to acquire Collective Brands in deal that will split the shoemaker

--Acquisition comes as Collective Brands has been closing stores and found itself at an inflection point

--Deal is expected to close in the back half of 2012

(Adds details from Wolverine's conference call, analyst commentary, latest stock quote, in the fourth, seventh, 10th, 13th and 14th paragraphs.)

 
   By John Kell 
   Of  
 

Wolverine World Wide Inc. (WWW) and a pair of private-equity firms agreed to pay roughly $1.32 billion to acquire Collective Brands Inc. (>> Collective Brands Inc.) in a deal that will split portions of the shoemaker's business.

Along with Blum Capital Partners and Golden Gate Capital, Wolverine agreed to pay $21.75 a share to acquire the owner of Payless and Stride Rite, in a deal valued at about $2 billion when including the assumption of debt.

The purchase price represents a premium of 104% to the 30-day volume-weighted average trading price to Collective Brands' August disclosure that it was launching a review of strategic and financial alternatives.

Shares of Collective Brands ended Tuesday trading up 1.9% to $21.16, while Wolverine's stock dropped 4.4% to $40.10.

The planned acquisition came as Collective Brands found itself at an inflection point. Last summer, the company said it would close about 475 underperforming stores over a three-year period in an effort to better position its Payless and Stride Rite stores.

Upon closing, which is expected to occur in the back half of 2012, Wolverine will acquire Collective Brands' wholesale and retail operations of the Sperry Top-Sider, Saucony, Stride Rite and Keds brands. That unit had more than $1 billion in revenue in the fiscal year ended Jan. 31.

Blum Capital and Golden Gate will jointly pick up the operations of Payless ShoeSource and Collective's international-licensing arm. Those units had $2.4 billion in revenue in the latest fiscal year and operated more than 4,300 stores globally.

Wolverine estimated the deal would have a minimal impact on its 2012 results but would add 25 cents to 40 cents a share to 2013 earnings and 50 cents to 70 cents a share in 2014. That three-year window excludes one-time transaction expenses, integration costs and other acquisition-related expenses, which are expected to collectively hurt 2012 earnings by 20 cents to 30 cents a share.

Wolverine, which already owns the Hush Puppies, Merrell and Cushe brands, has seen rising demand for minimalist footwear and strong sales abroad, with the Merrell brand emerging as a particular source of strength. The company has increased its spending to support initiatives to spur further growth, but the higher costs have pressured its bottom line and margins of late.

Before 1993, Wolverine had just three brands--the namesake line, Hush Puppies and Bates. Since then, the company scoped up a handful of brands, often beginning from a small geographic base before expanding the acquired brands to more international markets. Wolverine will own 16 brands after acquiring the four owned by Collective Brands.

Nearly one-third of Wolverine's revenue and more than 60% of volume is derived from international operations while the Collective Brands business is largely in North America with only 10% of revenue coming from outside that region. Wolverine Chief Executive Blake Krueger told analysts during a conference call that his company could leverage long-established distributor relationships to accelerate international growth of the newly acquired brands.

For example, Krueger said 4% of Sperry's revenue was generated outside of North America though he believes the brand's strong women's business, youthful image and broad range of prices makes it ideal for international expansion. He added that Saucony closely aligns with Wolverine's largest brand, Merrell, as both incorporate a minimalist style and address the training and running categories.

In an interview with Dow Jones Newswires, Krueger said the deal would help to address some of Wolverine's underpenetrated categories. Less than half of Wolverine's business is in the women's arena but Wolverine will have a greater ability to reach those customers as three of the acquired brands--Sperry, Saucony and Keds--skew heavily to women.

Krueger said that, with the acquisition of Stride Rite, about 15% of reported sales will come from retail, above the current 7% total. Additionally, the Stride Rite retail presence will give the company an opportunity to bolster sales of Wolverine's children's lines.

Wolverine will fund its portion of the deal through a combination of cash on hand, $900 million of bank term loans and a $375 million notes offering. Chief Financial Officer Donald Grimes said the company will have a new $200 million revolver that will be untapped at the acquisition's closing.

Morningstar analyst Paul Swinand said that, though Wolverine and the private-equity firms touted the high premium prior to Collective Brands' strategic review announcement, the purchase price wasn't too rich as the stock, in his view, had been "enormously undervalued" when it was trading between $9 to $10 a share.

Swinand said Morningstar had a fair value of $22 on Collective Brands. He added that Wolverine is paying a higher multiple for the Collective Brands business than what VF Corp. (>> V.F. Corporation) paid for Timberland Co.

Analysts have said the timing of a deal to acquire Collective Brands made sense, as the Sperry and Saucony brands have performed well and as the economy picks up. Observers said they doubted a bidding war would ensue for the company and investors on Tuesday seemed to agree as the share price is currently trading under the deal's value.

-By John Kell, Dow Jones Newswires; 212-416-2480; john.kell@dowjones.com

Stocks mentioned in the article : Collective Brands Inc., V.F. Corporation
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