The deal that sees Soffe become a unit of publicly-traded Delta Apparel Inc. appears to be worth $72 million if all performance conditions are met.

The $52 million cash portion of the deal will be funded through existing loan agreements ($20 million), $8 million in promissory notes and new loans based on Soffe’s assets ($32 million). The balance of the payout is contingent on Soffe management hitting future performance goals, seen as a hedge against any hiccups in revenue or profit projections.

Delta expects the acquisition to add 60 cents to 80 cents to EPS in the first year of the deal. But management was quick to point out that DLA would need to be earning “beyond that to trigger (the) payouts”. DLA is making the initial estimates without benefit of completion of due diligence and said the EPS gain “can be higher” once the benefits of synergies are factored in.

Delta also highlighted the distribution channels that Soffe brings to the table. In a conference call with analysts, Delta CEO Bob Humphreys said Soffe added four new distribution channels for Delta, stating that 50% of Soffe’s business was in Sporting Goods, 20% with the U.S. Military, 19% in Department Stores, including Kohl’s and Goody’s, and 6% College Bookstore.

The other benefit seen by DLA is category expansion, stating that Soffe offers categories that Delta was planning to pursue. Management pointed to Soffe’s strengths in poly cotton T’s and its fleece and shorts business as key drivers to the move.

Delta said Soffe has 15,000 accounts with over 18,000 doors. The company’s top 10 accounts represent 30% of the business and no account represents more than 7% of sales.
Another key piece of the deal that was highlighted by DLA was the fact that neither company will show any goodwill on the books after the deal. The detail means that Delta feels they did not pay a premium above book value on the deal. When pressed by analysts, DLA stated that the valuation for Soffe was based on Delta’s current EBIT multiple assessed against Soffe’s EBIT.

Jim Soffe will continue to serve as CEO of M. J. Soffe.
Kurt Salmon Associates Capital Advisors served as M. J. Soffe’s financial advisor in connection with the proposed transaction.

DLA, citing soft “commodity t-shirt pricing” in its fiscal fourth quarter ended June 28, 2003, said sales for Q4 were expected to be approximately $36.8 million, a decline of 15.2% from the $43.4 in the year-ago period. Basic EPS for the quarter are seen in the 34 cents to 39 cents range, compared to $1.20 in fiscal Q4 2002.

Basic earnings per share for the year are expected to be in the range of $1.43 to $1.48, compared to $2.96 for last year.

Humphreys pointed to average selling prices in Q4 that declined “approximately 10%” from last year, and down approximately 7% from Q3. Sales to distributors were down over 50% for the quarter. New customer growth was up 49%. Textile operations were idled for a week in the fourth quarter to help balance inventories.


>>> Unlike most other deals we see like this, it appears that the suitor is looking to the new subsidiary to help diversify and grow the business. We heard little about how Delta could help Soffe. Delta is clearly floundering in the commodity sector and needed to establish a better business fast…