DSW to Merge With Retail Ventures; Raises Outlook

DSW Inc. and its largest shareholder, Retail Ventures, Inc. announced that the two companies have signed a definitive merger agreement providing for RVI to become a wholly-owned subsidiary of DSW.

 

The transaction will be done in a tax-free exchange of shares at an exchange ratio of 0.435 DSW shares per each RVI share. The off-price shoe chain also it expects between $2.38 to $2.42 for fiscal 2010, up from previous guidance of $2.30 to $2.40. In the prior year, it earned $2.30 a share.

 

The company incurred charges associated with the merger transaction with RVI that impacted 2010 diluted earnings per share by approximately 5 cents a share. DSW said 2010 revenues grew 16.4% to $468.5 million. Comps were ahead 14.9% versus an increase of 12.9% in the prior year.

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DSW to Merge With Retail Ventures, Raises Outlook

DSW Inc. and its largest shareholder, Retail Ventures, Inc. announced that the two companies have signed a definitive merger agreement providing for RVI to become a wholly-owned subsidiary of DSW.

The transaction will be done in a tax-free exchange of shares at an exchange ratio of 0.435 DSW shares per each RVI share.  

The transaction is expected to generate significant value for DSW, RVI and their respective shareholders, including the following:

    * Eliminates the complexity and public company expenses associated with RVI, which is a listed company whose only operating business is its 62% stake in DSW.
    * Allows RVI shareholders to become shareholders directly of DSW, an entity which produces significant revenues, has over $300 million in cash and short-term investments and has no debt.  
    * Increases the public float of DSW shares to the extent that RVI public shareholders receive publicly listed DSW Class A shares.
    * Results in DSW having slightly fewer diluted shares outstanding upon closing.
    * Allows DSW the opportunity to efficiently decrease the number of diluted shares outstanding in the future without the need to repurchase common shares. DSW gains control of the settlement of RVI's outstanding Premium Income Exchangeable Securities (PIES) with a face value of $134 million that mature in September 2011. At that time, DSW would have the option to settle in cash as opposed to distributing DSW shares. Assuming the PIES are settled in cash, the number of DSW diluted shares outstanding would be reduced by approximately 10% resulting in accretion to DSW's 2011 diluted EPS.
    * Allows the potential to utilize approximately $350 million of federal net operating losses and additional tax credits to offset DSW's taxable income, which are expected to generate significant cash tax savings over the next several years.

Shares of RVI will convert into Class A DSW common shares at an exchange ratio of 0.435 DSW shares per each RVI share, unless the holder properly and timely elects to receive a like amount of DSW Class B common shares in lieu of DSW Class A common shares. Class A shares are listed on the New York Stock Exchange and Class B shares are unlisted. The voting rights associated with the two classes of shares will be the same as the currently outstanding Class A common shares (one vote) and Class B common shares (eight votes) of DSW.  RVI's largest shareholder, Schottenstein Stores Corporation and its affiliates, has indicated it intends to elect to receive Class B shares.

For accounting purposes, DSW will effectively retire the 27.4 million class B shares currently owned by RVI (approximately 62% of DSW's fully diluted shares outstanding). As a result of the merger, the separate corporate existence of RVI will cease and the surviving entity will continue as a wholly owned subsidiary of DSW. DSW estimates that it will have slightly fewer diluted shares outstanding as a result of this transaction.

RVI has adopted a shareholder rights plan to help preserve the value of the net operating losses by reducing the risk of limitation of net operating loss carryforwards and certain other tax benefits under Section 382 of the Internal Revenue Code. In connection with the rights plan, RVI has declared a dividend of one right for each share of common stock outstanding as of the close of business on February 24, 2011.

After the rights plan takes effect, any shareholder or group that acquires beneficial ownership of 5% or more of RVI's outstanding stock (an “acquiring person”) without the approval of the RVI board of directors could be subject to significant dilution of its holdings. Existing shareholders holding 5% or more of RVI's common stock will not be considered acquiring persons unless they acquire additional shares, subject to certain exceptions described in the rights plan. In addition, in its discretion, RVI's board of directors may exempt certain transactions and certain persons whose acquisition of securities is determined by the board not to jeopardize RVI's net deferred tax assets. The rights will expire on September 15, 2011 unless such date is advanced or extended by RVI's board of directors or the rights are earlier redeemed or exchanged by RVI as described in the rights plan.  

Each of DSW and RVI appointed a special committee of independent directors to negotiate the transaction and each appointed its own independent financial advisor and legal counsel.  Goldman, Sachs & Co. served as financial advisor for the special committee of the board of directors of DSW and Katten Muchin Rosenman LLP acted as independent counsel. Houlihan Lokey served as financial advisor for the special committee of the board of directors of RVI and Baker & Hostetler acted as independent counsel.

The transaction is subject to, among other conditions, approval of a majority of the outstanding shares of DSW held by disinterested DSW shareholders (excluding Schottenstein Stores Corporation and its affiliates, and affiliates of RVI), approval of a majority of the outstanding shares of RVI, and other customary conditions and approvals.

DSW Fourth Quarter and 2010 annual sales results

DSW's net sales for the fourth quarter ended January 29, 2011 increased to $468.5 million compared with $402.6 million for the quarter ended January 30, 2010.  Same store sales increased 14.9% for the comparable period versus an increase of 12.9% last year. 

DSW's net sales for the year ended January 29, 2011 increased to $1.82 billion compared with $1.60 billion for the year ended January 30, 2010. Same store sales increased 13.2% for the comparable period versus an increase of 3.2% last year. 

DSW 2010 Earnings Outlook

DSW now estimates annual diluted earnings per share of approximately $2.38 to $2.42 for fiscal 2010. This is updated from the Company's previous estimate of annual diluted earnings per share of approximately $2.30 to $2.40 for fiscal 2010.  The Company incurred charges associated with the merger transaction with RVI that impacted 2010 diluted earnings per share by approximately 5 cents a share.

About The Author

Thomas J. Ryan

Thomas J. Ryan Senior Business Editor | SGB Media tryan@sportsonesource.com | 917.375.4699

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