When SEW looked at the circumstances surrounding the “merger” of TSA and Gart, it was quite interesting that the parties positioned the idea for the deal as almost kismet, it was meant to be. Well, the Dicks acquisition of Galyans has turned out to be quite different, and has all the markings of a well thought out plan of the hunter pursuing the hunted, but with the hunted setting the terms.
This deal has its origins in initial contacts dating back to April 23, 2003 initiated by Dicks when CEO Ed Stack and CFO Mike Hines first broached the idea with Freeman Spogli & Co., which owns about 33% of Galyans shares.
By June of last year, the Board had brought Bob Mang, Galyans CEO at the time, into the conversation. Dicks worked a deal to get due diligence moving along, which required Dicks to sign a one-year confidentiality agreement. The NDA was later revised to include additional provisions restricting the solicitation of each others employees and also restricting Dicks right to acquire GLYN shares and solicit proxies. Both parties signed the agreement in late June 2003. Dicks was also restricted from any attempts to influence GLYN management or its Board.
As reported in SEW one year ago today, Galyans issued a sales and earnings warning (SEW_0328) for its fiscal second quarter results. The action pushed GLYN shares down 18% for that week to close at $11.49. Days later, DKS “indicated a potential acquisition price” of $14 per share and was told that Galyans had no interest in a deal at that price. GLYN shares were trading in the neighborhood of $12 at the time, down from $15 before the earnings warning. Galyans reps said they werent interested and discussions regarding a possible acquisition ceased, according to the most recent filing with the SEC.
In late August 2003, Galyans warned about a shortfall for the third quarter and also announced they would go quiet on any further quarterly earnings guidance. Shares fell to $10.82 that week.
Conversation between the two retailers apparently went quiet as well until November, when Galyans apparently took issue with the loss of a number of employees to Dicks in the fall of 2003 and sent a letter to Dicks alleging that they had “breached the non-solicitation terms of the confidentiality agreement”.
The letter was sent about a month after Dicks hired Denny Feldman, Galyans long-time Outdoor chief, to run the Dicks Lodge business (SEW_0344). Dicks denied any breach of the agreement.
SEW found it interesting that Galyans also announced in November (SEW_0347) that they were shifting their model away from a heavy reliance on apparel and outdoor to a model we saw as more in line with Dicks, a key competitor (or possible suitor).
Galyans decided to go even quieter in November and announced that month that they would cease reporting quarterly comp sales results in advance of its earnings release.
Dicks was preoccupied at the time with their pursuit of the Bobs Stores real estate, a move that would have given them a stronger hand against rival TSA in New England. When Dicks lost their bid to TJX, parent of TJ Maxx and Marshalls, Dicks soon turned their attention to Galyans again, and this time they brought more than an olive branch.
Dicks was as subtle as a sledgehammer as they soon decided to take the fight right to Galyans back door.
Management started approaching vendors in January of 2004 looking for off-price deals to help fuel their entrance into the Indianapolis market in April. Dicks was quite mum about the reasoning (and timing) behind the number of stores opened, or the aggressive style in which they entered the market, but it soon became clear to many that there was more than a single market at stake here.
We assume it didnt take long for the Galyans Board of Directors to see the writing on the wall either.
In March 2004, Mr. Mang was replaced as CEO by Ed Holman, who had been brought in as president and COO in July 2003.
In April, Dicks approached GLYN board member John Roth, also a Freeman Spogli general partner, to discuss a renewed interest in the acquisition of the company. Mr. Stack later contacted Ronald Spogli, also a GLYN board member, and told him of his interest in acquiring Galyans. GLYN shares were hovering around $10 at the time, almost 30% below the original offer by Dicks.
Still, Spogli said the deal wasnt in the best interests of the shareholders and “expressed concern” over Dicks “completing the transaction”. Stack assured Spogli he was quite serious about closing the deal.
Dicks representatives also approached GLYN board member Tim Faber, who is also VP treasury for Limited Brands, to discuss their desire to acquire Galyans. Limited Brands owns approximately 22% of outstanding GLYN shares.
Dicks representatives subsequently advised the Galyans reps that they would up the deal to $15 per share.
Another director, George Mrkonic, who serves on a number of other boards, was designated along with Faber and Roth as the lead in the discussions with Dicks. Mrkonic apparently told Stack they werent interested and declined to provide due diligence information.
Still, Dicks then sent to Galyans a draft merger agreement for an acquisition and a draft shareholder tender agreement at the $15 price per share.
The revised deal seemed to do the trick and the three GLYN directors met with Dicks in early May 2004. A number of other meetings followed which helped fine tune a revised confidentiality agreement and ultimately a revised draft agreement that was sent by Galyans to Dicks in mid-May.
Again, documents went back and forth for fine-tuning until Mr. Stack sent a letter to Mr. Mrkonic to increase the price to $16 per share. He requested a response by June 9. Galyans advisors informed Dicks on June 9 that it would accept a price of $17 per share if Dicks accepted a revised draft of the merger agreement and the shareholder tender agreement that was delivered by Galyans that day.
On June 14, DKS increased the offer to $16.50, provided that GLYN enter into (by the close of business on June 16, 2004) the form of merger agreement and shareholder tender agreement prepared by DKS. The two parties met on June 17 and 18 in Pittsburgh at Dicks HQ to hammer out the details of the deal. On June 18, the GYLN board said it would accept a deal at $16.75 per share. DKS said it would do the deal at that price only if GYLN accept the resolution of the then open issues contained in the form of merger agreement prepared by Dicks. The GLYN rep agreed.
The Galyans Board of Directors met on the afternoon of June 21 and approved the Merger Agreement. The deal was signed that afternoon.
Many have speculated that Dicks paid too much for this deal, and some feel Dicks was not about to lose this after the loss of the Bobs deal. If Dicks had pushed Galyans into Chapter 11 — a real possibility if they were forced to overspend to protect their turf — they could have ended up in a real estate bidding process that brought them fewer stores for less, but could have also strengthened TSA in the process as well.
>>> This was surely expensive based on the share price at the time, a price that GLYN hasnt seen since May 2003, but what would have been the cost if TSA ended up with three stores in Indianapolis and blocked Dicks out of Atlanta?
