Adrenalina last Monday made an unsolicited offer to acquire much-larger rival Pacific Sunwear of California for about $295 million. But PacSun’s board on Tuesday rejected the offer as “not in the best interests of the company’s shareholders.”
The $4.50 cash and stock offer represented a 24% premium to Pacific Sunwear’s closing price of $3.62 on Friday. But it was well off the $14.11 the stock fetched at the start of the 2008. Adrenalina’s decision to take the proposal directly to PacSun stockholders came after PacSun CEO Sally Frame Kasaks repeatedly declined Adrenalina’s prior attempts to enter into discussions, Adrenalina CEO Ilia Lekach said.
In an exclusive interview with SEW, Lekach said part of the reason for the deal is it will ease the burden on aggressive expansion of the Adrenalina concept, which features flowrider surfing simulation machines inside each location to drive traffic.
“Adrenalina is a superb retail entertainment concept,” said Lekach. “Over a million people go through each of our doors per year to the point that the big mall developers are paying us $2 million to open each door.”
“We are on our way to opening a lot of stores really fast,” added Lekach, who formerly ran Perfumania and Parlux Fragrances. “So in these difficult economic times, it doesnt make sense to build the infrastructure when we can share with a very good existing infrastructure.”
The two-year-old company operates just three stores in Florida, but has three more under construction in Alpharetta, GA; Denver, CO; and Plano, TX. It has also signed leases in Houston, TX, and East Rutherford, NJ. P acific Sunwear operates 813 PacSun stores and 124 PacSun Outlet stores.
On the other hand, he called Pacific Sunwear “a powerful brand name whose underlying retail concept has grown stale,” and could be revived by tapping into Adrenalina’s “proven entertainment retailing concept.”
If the merger is consummated, both Pacific Sunwear and Adrenalina will remain distinct chains. Lekach also doesnt see flowriders moving into Pacific Sunwear since the store size is too small. Adrenalina’s newer stores under construction range from 10,000 to 15,000 square feet.
But he believes Adrenalina’s expertise in action sports hardgoods and its successful lifestyle concept can help guide PacSuns reinvention.
He believes PacSun’s new “boutique clothing focus” with a much greater focus in women’s apparel is a failed strategy because it doesnt capitalize on its action sports heritage. At the least, PacSun should more closely resemble Zumiez with an ample selection of skate and snowboard equipment as well as footwear to better reach the Gen-Y and Gen-Z generations, according to Lekach. Given the demand for the Adrenalina concept, PacSun should benefit from better terms from landlords and greater access to key action sports brands.
The Adrenalina brand, supported by an extreme sports TV show under the same name, also represents a strong opportunity for growth as a private label at PacSun stores. Finally, Lekach sees numerous marketing opportunities between the two chains, such as discounts being sold at PacSun to try a flowrider at a nearby Adrenalina, to help drive traffic to PacSun.
“PacSun desperately needs to reinvent itself and reposition itself to be more relevant to its target customer,” said Lekach. “And I believe Adrenalina can energize PacSun to become what theyre supposed to be. Although Adrenalina is a lot smaller than Pacific Sunwear, we do have the direction right and they dont.”
Indeed, the main reason many on Wall Street dont see the deal happening is because of the size of Adrenalina as well as difficulties gaining financing in the current credit market. Adrenalinas sales were $3.2 million last year versus $1.45 billion for PacSun.
PSUN shares closed at $2.90 on Friday, down 19.9% for the week, after moving up as high as $4.10 mid-week.
Regarding financing, Lekach said he’s “highly confident” that he can raise funding for the buyout from private individuals, institutions and synergistic partners, particularly given the amount of interest he has received from the investment community for those looking to invest in Adrenalina and the potential to capitalize on PacSuns sizeable footprint.
Lekach declined to say if he was willing to increase the bid on the deal, but he noted that the cash and Adrenalina common stock offer enables shareholders to participate in any upside from the combination.
He concluded that although PacSun is much larger, “this is one case where size really doesnt matter, because what is important is that we have all the ingredients and they desperately need to do something.”
