If you were surprised by Monday evenings announcement regarding the Dicks Sporting Goods acquisition of Galyans Trading Company, you probably have not been reading between the lines (or BOSS) for the last six months. After Dicks failed in its attempt to quickly capture real estate in the Northeast in the Bobs deal, Galyans announced that they would be exiting some of the outdoor business in favor of athletics and moving to more single story formats, and Dicks started to move to more two-story formats, the question really became an academic one.
Galyans only needed a one last hefty push over the falls to make this all happen and that came when Dicks entered Indianapolis in April with the subtlety of General Norman Schwartzkoff in Desert Storm.
The deal will result in a new quasi-national chain that will see 239 Dicks Sporting Goods stores in 33 states from Massachusetts to Las Vegas by year-end 2004. The combined entity had 216 stores in 32 states generating income of $56 million on sales in excess of $2.2 billion at fiscal 2003 year-end. The combined EBITDA was $138 million, which like net income, was driven primarily by DKS.
The conversion to the Dicks format is expected to be completed in the first half 2005. The deal puts Dicks in the catbird seat in the East as their largest big-box rival attempts to re-build the TSA chain in the East from Denver while growing the former Gart business in the West. The deal also pits TSA and Dick's solidly against each other in the Sportmart territory and opens up Texas for Dick's to compete with Oshmans and now lands them in the backyard of their chief rival. The deal now gives them a solid foothold in Chicago, Atlanta, Minneapolis, Dallas and Denver.
Dicks is acquiring Galyans at $16.75 per share, or $305 million in cash, and approximately $57 million net debt for a total deal value of $362 million. DKS said Galyans generated $719 million in sales over the last 12 months ended in April. The purchase price, which is a 53% premium over the GLYN closing price last Friday, represents a valuation that is 10.6x last 12 months EBITDA of $34.2 million, but Dicks sees the value closer to 6,7x EBITDA when factoring in the $29 million in anticipated savings and synergies in 2005.
Dicks will fund the deal with cash on hand, which totaled approximately $173 million on May 1, and borrowings under their $350 million credit facility which is expected. They have a bridge loan in place just in case.
The deal is expected to be completed in October 2004. The affiliate of Freeman Spogli & Co. and Limited Brands, Inc. that own 55% of GLYN common shares have already to tender their shares to Dick's.
BOSS quipped back in March (BOSS_0410) that this would be a real estate play after new Galyans CEO Ed Holman said he didnt see them as much of a fit for anyone from a merchandising perspective. Dicks is all about real estate and putting their strong operational model in place, a strategy that should see the former Galyans stores start to produce better results sooner rather than later. Yes, the merchandising mix will need to be re-vamped, and there is surely too much real estate in some locations, but the quant little operation born in Binghamton, NY and entered adulthood in Pittsburgh, PA, has a clear head and a sound plan that is expected to help push DKS earnings up more than 30% next year.
“Combining the financial discipline, operating metrics, and innovative store design of Dick's that have led to our industry-leading financial performance, with the people, real estate, and distribution infrastructure of Galyan's creates a compelling rationale for this transaction,” said Ed Stack, chairman and CEO of Dick's Sporting Goods. “The Dick's Sporting Goods and Galyan's store locations are complementary, and the combination of the Galyan's store design, customer service and premium locations with Dick's emphasis on execution and inventory management make for a best in class shopping experience.”
Dicks said they feel they now have more comfort with the two-story formats that dominate th Galyans real estate portfolio. Stack said their experience with their five current two-story stores gives them reason to believe they can produce economic returns “equivalent” to the single-story format.
The new Galyans headquarters in Plainfield, IN is expected to be shuttered, but the Galyans DC will be retained to service the combined entities stores in the West. Stack also said he sees Dicks “increasing overall bench strength” by adding “many” of the Galyans people to the Dicks team.
The last year has already seen a merger of sorts as personnel from Galyans systematically started the move over to Dicks as the writing on the wall became all the more defined in Indianapolis. Not that Interstate 70 started to look like a column of ants after a dropped piece of food at a picnic, but Dicks has certainly secured some key people in some core positions, most notably Denny Feldman, who now heads up the Lodge business for DKS after running Outdoor for Galyans for years.
DKS sees the acquisition as “slightly accretive” to its previous guidance for fiscal 2004 that estimated diluted EPS in the $1.27 to $1.28 per share range for the year. Revised guidance now calls for $1.28 to 1.30 per share for 2004 excluding merger costs, but anticipates that fiscal 2005 diluted EPS could increase “more than 30%” over previous guidance to $1.70 to $1.75, based on anticipated synergies and “approximately $20 million of annualized cost savings and merchandise buying improvements that will result from the acquisition.”
Peter J. Solomon Securities Company Limited and Merrill Lynch & Co. provided financial advisory services to Dick's Sporting Goods in connection with the transaction.
>>> Look for more from BOSS on this deal as the week progresses
>>> It appears that Richard Leto, President and CMO, made a killing on this acquisition. He began work on 6/14. Under the terms of his employment agreement, with a change in ownership Leto is entitled to a payout of his annual salary ($600K), a payout of all of his target bonus ($450K) and all of his options (250,000 @ $9.60), netting him a total gross payout of about $3 million for a week's work…
