Wolverine Worldwide, parent company of Hush Puppies, Merrell, Sebago and other brands, announced on May 1 that it has won the bidding process for the Performance + Lifestyle Group (PLG) of Collective Brands, which includes four iconic shoe brands - Saucony, Sperry Top-Sider, Stride Rite and Keds – forming what the management calls a “global footwear and lifestyle brand powerhouse” and raising its annual turnover by about $1 billion to over $2.5 billion, starting next year
Wolverine has already arranged 100 percent debt financing to pay $1.23 billion in a debt-free transaction for these operations, which were the cash cow of Collective Brands, or ten times their projected operating profit before amortization (Ebitda) for 2012. The expanded group should have combined annual Ebitda of nearly $300 million after the closing of the deal, which is expected to take place in August or September, after approval by shareholders and regulatory authorities. PLG's sales are seen rising at an annual rate of between 5 and 10 percent.
The rest of Collective Brands - consisting essentially of Collective Licensing International (Above the Rim, Airwalk, Clinch Gear, Strikeforce, Vision Street Wear) and the struggling Payless ShoeSource chain of shoe shops, will be taken over by two investment firms, Blum Capital and Golden Gate, as part of an overall deal worth the equivalent of about $2.0 billion, including assumption of debt.
This overall purchase price of $21.75 a share represents a 104 percent premium over the average trading price of Collective in the 30 days before its announcement last August that it was reviewing financial and strategic alternatives, following major losses.
Blum owns a stake of about 6 percent in Collective. Golden Gate is an active investor in various leading brands in the retail and restaurant sectors in the U.S., with stakes in the likes of California Pizza Kitchen, Romano's Macaroni Grill, Eddie Bauer and Pacific Sunwear. Both companies are based in San Francisco.
Wolverine said that PLG's entire management will remain in place at its head office in Lexington, Massachussets under the leadership of its current chief executive, Gregg Ribatt. PLG will act as an independent operational unit like Wolverine's three other existing divisions.
Through this big acquisition, which Krueger described as “transformational,” Wolverine is ending up with a rather balanced portfolio of 16 brands that target different age groups, genders and lifestyles in the casual, athletic, outdoor and work segments – all “aligned with macro consumer trends” and offering interesting opportunities for expansion and for higher profits through greater economies of scale.
In particular, Wolverine's management stressed in a conference call that the newly acquired brands offer opportunities for its existing brands in the athletic, women's, children's, casual and retail sectors. Saucony, for example, is a fast-rising brand of running shoes that can help Merrell to develop in running and in the growing barefoot segment.
On the other hand, Wolverine can help PLG to develop more widely outside North America. The potential for international expansion is huge. Only 10 percent of PLG's sales are now generated outside North America, although the company has been boosting its European staff to a total of 151 persons, 108 are working out of its European head office in the Netherlands.
At Wolverine, instead, the ratio of international sales has grown to 32 percent of sales, and it is expected to grow further. In terms of volume, the ratio is even higher at 61 percent of 52 million pairs or units of merchandise. The ratio is higher in terms of volume because many of the products sold under the group's brands abroad generate lower revenues or only royalties for the group because of wholesale distribution or licensing agreements.
Saucony, which has become the number three brand in the U.S. specialty running circuit, is the most international brand of Collective, as it made 23 percent of its turnover of $270 million outside North America last year. It is looking at a sales increase of more than 20 percent in Europe in the first half of 2012.
Wolverine says the acquisition will have only a minimal negative impact on its profitability in 2012, but it should add between 25 and 40 cents to its earnings per share in 2013 and between 50 and 70 cents in 2014, excluding acquisition and integration costs. It is looking at synergetic cost reductions of between $6 million and $10 million a year between 2013 and 2014, mostly in sourcing.
Wolverine plans to finance the acquisition through cash and debt. The company's net debt should increase to a level equal to 4.2 times Ebitda after the closing of the transaction, but Wolverine feels that it will be able to take the ratio down to 2.2 by the end of 2014.
We have run a more detailed account of the business plan related to this acquisition in Shoe Intelligence, our publication on the non-athletic shoe market. We can send you a copy if you wish.
