Forzani Group Ltd., Canada’s largest sporting goods chain, reached an agreement to be acquired by Canadian Tire in a deal valued at Canadian $771 million (U.S. $800 mm). Canadian Tire said the the merger will create “Canada’s ultimate authority in sports, with more than 1,000 combined retail sports outlets across the country.”

The transaction is valued at Canadian $26.50 per share, a 50 percent premium on the closing price of Forzani’s stock on Friday. Canadian Tire said the purchase will be completed using $500 million in cash and short-term financing, and has been unanimously approved by Forzani’s board.

The company expects the transaction to close in the third quarter.

Canada Tire said Forzani is Canada’s leading sporting goods retailer with over 500 retail outlets, annual revenue of approximately $1.4 billion and some of the country’s most recognized sports brands such as Sport Chek and Sports Experts. More than 70 percent of Forzani’s sales are in athletic apparel and footwear, with the balance of sales in sporting hard goods that complement Canadian Tire’s assortment with very little overlap.

Canadian Tire said it will also gain from having access to an expanded customer base with Forzani’s retail banners, including mall-based shoppers and the important 18-35 year old customer segment.

“Canadian Tire is today strengthening its credibility as Canada’s ultimate authority in sports,” said Stephen Wetmore, president and CEO of Canadian Tire.  “The acquisition of retail banners like Sport Chek and Sports Experts is a natural extension of our core sports business.

“Canadian Tire is on offense,” continued Wetmore.  “This transaction will bring us to over 1,000 retail sports outlets across Canada, allowing us to serve nearly every need of every Canadian who plays or loves sports at every level.”

“The businesses of Canadian Tire and Forzani are complementary,” added Bob Sartor, CEO, Forzani Group Ltd. “The transaction has the unanimous support of the Forzani Board of Directors. It creates significant value for our shareholders and positions our business for accelerated growth under a company that shares our culture and values.”

Transaction Details

The offer to FGL shareholders of $26.50 per share represents a 45% premium based on a 10-day volume weighted average price as of May 6, 2011.  The offer was made pursuant to a Support Agreement signed between Canadian Tire and FGL and received unanimous support of the FGL Board of Directors.  Terms of the Support Agreement provide for, among other things, a non-solicitation covenant on the part of FGL, a right in favor of Canadian Tire to match any superior proposal and a payment of $15 million to Canadian Tire if this transaction does not proceed in certain circumstances.  Canadian Tire currently holds approximately 4 percent of FGL’s shares.

The deal is expected to close in in the third quarter and is expected to be accretive to earnings in 2011.  In addition, Canadian Tire expects to realize significant cost synergies by leveraging the strengths of both organizations, including supply chain, marketing and global sourcing. Annualized savings are expected to be about $35 million, with approximately $25 million of annualized savings realized in 2012.

Canadian Tire said its financial capacity to undertake this transaction is strong.  The offer is not subject to a financing condition.  It is anticipated the $771 million acquisition (excluding FGL debt and shares already owned by Canadian Tire) will be financed with $500 million of cash on hand and the balance with short-term financing.  Canadian Tire expects to return to pre-acquisition leverage levels within 18 to 24 months of closing the transaction.

Canadian Tire intends to operate the FGL retail banners as a separate business unit, similar to Mark’s and Canadian Tire Financial Services.

The offer is conditional upon tendering of shares representing a minimum of 66 2/3 per cent of the outstanding FGL shares on a fully-diluted basis. The transaction is also subject to relevant regulatory approval (including the Competition Bureau), third-party consents and other customary conditions.

FGL’s Board of Directors, after receiving the recommendation of a Special Committee of the Board, has unanimously determined that Canadian Tire’s offer is fair to shareholders and that it is in the best interests of the company to support and facilitate the offer.  The FGL Board of Directors has received a fairness opinion from its financial advisor stating that the consideration to be received pursuant to the offer is fair from a financial point of view to the shareholders of FGL.  Accordingly, the Board of Directors of FGL is recommending to its shareholders to tender their shares to the offer. In addition, Canadian Tire has entered into lock-up agreements with each of FGL’s directors and senior officers pursuant to which they have agreed to tender their shares to the offer.

In a separate statement, Sartor said, “This transaction provides exceptional value for our shareholders and customers and positions the Forzani brands and banners for accelerated growth as part of a leading Canadian retailer. Our employees are some of the most knowledgeable and passionate in the Canadian sporting goods space. This transaction will enable us to move forward and provide our people with exciting new growth opportunities as part of a larger, more diverse organization.”

BMO Capital Markets acted as financial advisor to Canadian Tire.  Legal counsel was provided to Canadian Tire by Goodmans LLP and Stikeman Elliott LLP.

Greenhill & Co. Canada Ltd. acted as financial advisor to the company, Blake, Cassels & Graydon LLP acted as legal counsel to the company, Macleod Dixon LLP acted as legal counsel to the Special Committee and Longview Communications Inc. acted as communications advisor to Forzani on the transaction.

Forzani said its Board of Directors, after receiving the recommendation of the Special Committee of the Board of Directors and a fairness opinion from its financial advisor, Greenhill & Co. Canada Ltd., has unanimously determined that the Offer is fair to shareholders, that it is in the best interests of the company to support and facilitate the Offer, and has approved the Offer and recommends that FGL shareholders tender their shares to the Offer. In addition, the senior officers and directors of FGL, who collectively own shares and options representing approximately 8.24 percent of FGL’s diluted shares outstanding, have signed agreements to deposit their shares to the Offer.

In connection with the Offer, the company intends to postpone its annual general meeting of shareholders previously scheduled for June 8, 2011. The shareholder meeting will now be held on July 29, 2011 and in connection with the new meeting date, a revised form of management proxy circular will be sent to shareholders in advance of the meeting. At the meeting, shareholders will be asked to ratify the continued existence of the company’s Shareholder Rights Plan Agreement dated June 11, 2008. As a result of the Offer, the TSX has deferred its decision to review the continuation of the Shareholder Rights Plan Agreement.

Forzani’s corporate and franchise banners include: Sport Chek, Sport Mart, Athletes World, National Sports, Sports Experts, Intersport, Atmosphere, Tech Shop, Nevada Bob’s Golf, Hockey Experts, The Fitness Source and S3.