Genesco Inc., parent company of the Journeys, Underground Station and Johnston & Murphy shoe chains, has acquired Hat World Corporation, parent of the Hat World and Lids headwear chains, in a deal worth $165 million, “subject to adjustment for changes in net debt and working capital and for certain tax benefits”.

Hat World is currently majority owned by funds run by Bluestem Capital Co. and SKM Growth Investors, both private equity firms. said the acquisition price was “about 7 times EBITDA”, according to “a source familiar with the transaction”.

Hat World acquired Lids out of bankruptcy in April 2001 and has acquired Hat Zone Inc. and Cap Factory Inc. over the last two years. The company reported sales of $156 million for the last fiscal year and said it expects total sales of $198 million for fiscal year 2003 ended January 31, 2004.

GCO said it will fund the deal with $115 million in debt and $50 million from cash on hand. The company will replace its existing revolving credit facility, negotiating a commitment on “customary terms” for credit facilities totaling $175 million, which is expected to fund part of the acquisition, with Bank of America, N.A.

In a conference call with analysts, Genesco said that Hat World stores average 650 to 700 square feet and average $600/square foot in sales. They feel they can open 400 to 500 additional stores and expect to migrate towards Lids as single name plate for the chain.

GCO also said that Hat World had an 8.5% to 9% operating profit in 2003 and gross margins are “above 50%”.

Management described the acquired company as a “price leader” and “a full price operation”. Hat World sees their share of total market as “closer to 10% than 25%”.
The deal, which has been approved by both boards and should close in the first quarter of fiscal 2005, is expected to accretive to earnings per share by approximately 10 cents to 15 cents in the current fiscal year.

Not everyone liked the deal as Standard & Poor's Ratings Services on Friday revised its outlook on Genesco Inc. to negative from stable. S&P also affirmed its outstanding ratings on the company, including the 'BB-' corporate credit rating.

At issue is that total debt to EBITDA on a pro forma basis for the transaction is expected to increase to the mid 4x level, from about 3.8x for the 12 months ended Nov. 1, 2003. S&P sees the ratio as ” weak for the current rating”. S&P also expects that increased capital spending and working capital requirements to “diminish free cash flow generation”.

“The speculative-grade ratings on Genesco Inc. continue to reflect high business risk stemming from the company's participation in the competitive footwear retailing industry, its aggressive growth strategy, and high debt leverage,” said Standard & Poor's credit analyst Ana Lai in a published report. “These risks are partially offset by Genesco's good operating and financial performance in recent years.”

Robert Dennis is expected to continue as chairman and CEO of Hat World. The Hat World operation is also expected to stay in Indianapolis, IN.

Genesco shares rose 5.1% for the week to close at $18.18 on Friday.

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