Adrenalina submitted a proposal to Pacific Sunwear of California’s board of directors to enter into negotiations that will lead to the acquisition of PacSun for a price of $4.50 per share, consisting of a combination of cash and Adrenalina common stock.

Adrenalina’s acquisition proposal represents a premium of 24% above the closing price of PacSun common shares of $3.62 on Oct. 17, 2008, and is subject to PacSun’s Board and shareholders approval, execution of a definitive agreement, obtaining the requisite financing and certain other terms and conditions. Efforts to reach PacSun officials for comment were not immediately successful. 

 
“Our offer of $4.50 per share represents a significant increase in value for PacSun stockholders. This action also represents our confidence that Adrenalina can reinvigorate PacSun, a powerful brand name whose underlying retail concept has grown stale, by applying our innovative approach of fusing an exceptional product mix to an exciting entertainment destination,” said Ilia Lekach, Chairman and CEO of Adrenalina.
The deal amounts to Jonah swallowing the whale. Adrenalina was valued at about $35 million Monday morning, compared to $250 million for Pacific Sunwear. Adrenalina generated sales of $3.2 million in the year ended Dec. 31, 2007, compared to PSUN’s sales of $1.454 billion for the year ended Feb. 2, 2008.  
“Not only does the proposed acquisition price represent a premium to the current price of PacSun’s shares, but the cash/stock structure of the transaction would allow shareholders to participate in the future growth and performance of the re-energized combined company,” continued Lekach. “In addition, the business synergies from joining PacSun’s substantial store footprint with Adrenalina’s high-growth lifestyle retailing concept are compelling-especially in this challenging economic environment.”

Adrenalina has retail locations in Miami and Orlando, FL and has stores under construction in Tampa, Alpharetta, GA., Denver and Plano, Texas. The Denver and Plano stores contain 15,000 square feet. The company has signed leases in Houston, Texas and East Rutherford, New Jersey. As of Oct. 4, 2008, Pacific Sunwear operated 813 PacSun stores and 124 PacSun Outlet stores for a total of 937 stores in 50 states and Puerto Rico.

 
Lekach added that PacSun CEO, Sally Frame Kasaks, repeatedly declined Adrenalina’s prior attempts to enter into discussions, leading to the decision to take the proposal directly to the Board of Directors and PacSun stockholders.

Adrenalina released a copy of the letter written by CEO Ilia Lekach to PacSun CEO Sally Kasaks. Below is the full text.

October 17, 2008
 
Sally Frame Kasaks
Chief Executive Officer
Pacific Sunwear of California, Inc.
3450 E. Miraloma Avenue
Anaheim, California 92806

Dear Sally:

I am writing as Chairman and Chief Executive Officer of Adrenalina to propose a combination of our companies in a negotiated transaction that provides for the purchase by Adrenalina of all issued and outstanding shares of common stock of Pacific Sunwear of California, Inc. (PacSun) for a payment of $4.50 per share, consisting of a combination of cash and stock of Adrenalina. The transaction will require the approval of the Board of Directors of PacSun.

We are confident that this transaction will create value for PacSun shareholders well in excess of that which can be achieved by your company proceeding on its own. Not only does the proposed acquisition price represent a premium to the current price of PacSun shares, but the stock structure of the transaction would allow your shareholders to participate in the future growth and performance of the energized combined companies. In addition, the business synergies from combining PacSun’s substantial store footprint with Adrenalina’s high-growth lifestyle retailing concept are compelling-all the more so in this challenging economic environment.

Completion of the proposed transaction is anticipated to occur no later than February 2009 and is subject to customary conditions, including satisfactory completion of our due diligence, the execution of a definitive agreement between the two companies and completion of the funding, which we do not expect to present a problem.

The power of Adrenalina’s retailing concept in today’s market

PacSun would benefit greatly from the application of our proven entertainment retailing concept, which we believe will re-energize the performance of your stores.

Adrenalina stores are becoming a destination of choice for generation Y and Z’ers. Major landlords continue to approach us with a wide variety of proposals in the best retail centers across the nation. All our future store buildouts of $2,000,000 are entirely paid by tenant allowances. The Company’s leasing team is constantly researching and evaluating new locations in the most important markets and busiest malls throughout the US.

The stores are designed and positioned as a focal point for extreme sport enthusiasts of all generations and those who want to learn more about this Lifestyle. In this regard, the store offers dedicated areas which are focused on a particular extreme sport, and the coordination of FlowRider sessions and lessons with qualified instructors, all with the intent of promoting the Adrenalina stores as the place to go, congregate and be seen for all who are interested in extreme sports and it’s Lifestyle.

Synergistic opportunities

We see many synergies between Adrenalina and PacSun, and we welcome you to consider some of them:

Increased connection with youth trendsetters and hardcore users: Adrenalina has established a strong connection with youth trendsetters and action sports hardcore users who influence wider audiences. Our unique marketing machine works as a direct income generator, while effectively reaching both action sports hardcore users and enthusiasts. Each Adrenalina with its FlowRider draws regular exposure in local and national media, which benefits the company as a whole.

Product portfolio extension without losing focus: Adrenalina has expertise in action sports hardgoods, which select categories could be rolled out to allow PacSun to quickly profit from this important product category. Furthermore, PacSun has strong private label experience that could be leveraged on Adrenalina branded products.

More than 1,000,000 people go through each Adrenalina store per year, vendors want to be in Adrenalina. Because of this great visibility we are able to market specific deals with national suppliers.

Exponential business revenue and profit growth: Adrenalina is in expansion mode, and it has a long way to go before saturating the market. This provides PacSun with a tremendous new business growth path that will enhance the overall growth rate of PacSun. Furthermore because of PacSun’s operational efficiencies of current infrastructure, purchasing power and back end operations, Adrenalina stores could leverage the backbone of PacSun and open stores at a faster rate. The combined company could take meaningful advantage of landlords seeking Adrenalina stores.

In conclusion, PacSun needs to position itself better with generations Y and Z and to become more relevant to them. Combining with Adrenalina will achieve that trendsetter goal, drive revenue and improve profitability. The Adrenalina traffic level is highly coveted by suppliers, in conjunction with PacSun, this will drive considerable visibility to the combined company and ensure our success.

We urge your Board of Directors to seriously consider this proposal and would welcome the opportunity to meet with your Board to explore further. Please get back to me to schedule a meeting.

Very truly yours,

Ilia Lekach