Wolverine World Wide Inc. and a pair of private-equity firms agreed to pay roughly $1.32 billion to acquire Collective Brands Inc. in a deal that will split portions of Collective's business. Including the assumption of debt, the deal is valued at $2 billion.
Along with Blum Capital Partners and Golden Gate Capital, Wolverine agreed to pay $21.75 per share to acquire Collective. The deal was unanimously approved by Collective's board and is expected to close early in the fourth quarter.
Wolverine will end up with Collective's Performance + Lifestyle Group (PLG), whose brands include Sperry Top-Sider, Saucony, Keds, and Stride Rite. That segment of Collective, which pulled in more than $1 billion in revenue in the last fiscal year, will continue to operate out of Lexington, MA. Wolverine paid approximately $1.23 billion, or 10 times PLG's projected 2012 EBITDA, for the acquired brands.
Upon closing, Blum and Golden Gate will acquire Payless and Collective Licensing International, which will have separate headquarters in Topeka, KS, and Englewood, CO, respectively. That segment included more than 4,300 Payless stores globally and generated $2.4 billion in revenue last year.
The group reportedly beat out a bid by South Korean conglomerate E-Land Group in the final phase of a nine-month acquisition exploration. Other potential bidders earlier in the process reportedly included Deckers Outdoor, Columbia Sportswear, Brown Shoe, as well as the buyout firms TPG Capital and Leonard Green & Partners. Last August, Collective Brands hired financial adviser Perella Weinberg Partners and retail consultants Kurt Salmon to conduct a strategic review of its business, including a possible sale, amid declining domestic sales at Payless and disappointing results from Payless' expansion into Latin America.
Wolverine called that deal a “transformational acquisition” that will create a $2.5 billion global footwear and lifestyle brand powerhouse across 16 brands that includes Wolverine's star brands including Merrell, Hush Puppies and Sebago.
“Over the past several years, we have spent a considerable amount of time seeking acquisition opportunities to more fully diversify and expand our portfolio in targeted consumer areas,” said Blake Krueger , Wolverine Worldwide chairman and CEO, on a conference call with analysts. “In one stroke, this transaction provides us with the opportunity to meaningfully address five of our key targeted growth areas, women's, athletic, casual, kids, and retail. This acquisition positions our business for accelerated long-term growth both domestically and internationally and adds to our strong model for delivering shareholder value.”
Krueger said the four brands “complement Wolverine's brand strategies in a remarkable way,” enabling the company to “fill in white spaces in our brand coverage” Sperry Top-Sider, Saucony and Keds, for instance, each have a strong following among women. Saucony's leadership in the athletic space complements Merrell to provide a “powerful resource” in running, training, trail, minimalist and barefoot footwear. Stride Rite's leadership in the children's shoe category and meaningful retail presence also promise to boost Wolverine's existing brands in the kids space.
A notable opportunity will be growing the PLG's brands internationally. In 2011, international provided nearly a third of Wolverine's revenue and over 60 percent of its unit volume. By comparison, only about 10 percent of PLG's revenue was international. Said Krueger, “Our long-established distributor relationships and significant international infrastructure will enable us to lever our global distribution network and slingshot the PLG brand to accelerate international growth.”
Delving deeper into each acquired brand, Krueger noted that since 2002 Sperry Top-Sider’s revenues have approximately doubled every three years and in 2011, grew over 50 percent. Said Krueger, “Sperry Top-Sider's momentum is amazing.”
He said the brand over the past several years has transitioned from a midpriced boat shoe brand to a broader dual gender year-round brand with the highest casual footwear market share in the US, yet still has many untapped opportunities. The most obvious is international, which accounted for only 4 percent of Sperry Top-Sider’s sales in 2011. Said Krueger, “The brand's strong women's business, broad range of price points, and youthful image all point to a large international opportunity.”
Wolverine can also help build on Sperry’s success in newer initiatives such as retail, e-commerce, and apparel and accessories. Said Krueger, “We believe this is the opportune time to capitalize on the brand's momentum and wrap up investment to fuel these proven successes.”
Saucony holds the number three position in the run specialty channel in the US and has particularly tapped success in the fast-growing minimalist and lightweight categories.
“Saucony together with our largest existing brand, Merrell, will be very powerful across the growing categories of training, running, trail, minimalist, and barefoot,” said Krueger. “Both brands are rooted in technology and innovation and will collectively provide a broad offering for retailers and consumers.”
Again, international is seen as the quickest untapped growth path for Saucony. While Saucony is the most global brand in the PLG portfolio with about 23 percent of revenues overseas, “it is still very early” in developing an international foothold. Said Krueger, “Global interest in running has never been stronger and Saucony will take advantage of this trend with the upcoming Summer Olympics in London that will feature several Saucony-sponsored athletes.”
Stride Rite gives Wolverine a dominant position in children’s footwear. Said Krueger, “We have not historically been a strong player in this category. Stride Rite offers us the opportunity to leapfrog and emerge as a market leader, especially here in the US.”
Noting Stride Rite’s “enormous credibility with moms,” Wolverine plans to leverage both the brand’s wholesale and its 300 retail stores to expand Wolverine's other brands in the kids market. He also noted that Stride Rite’s stores ”are in the midst of a significant performance improvement project and the early returns are very promising as year-to-date comp store sales and profit margins are up substantially versus the prior year.”
Regarding Keds, Krueger said the size of the business is currently “not reflective” of the historic brand's recognition and consumer acceptance surrounding the brand. Said Krueger, “The new management team has developed a plan to take advantage of the deep heritage and brand equity that Keds has in vulcanized footwear, which as
everyone knows is a very sizable space in the global footwear market.”
For Wolverine, benefits include gaining scale to enhance its global infrastructure and regional resources and better target emerging global market opportunities, adding talent from the PSG team, and securing an expanded portfolio to present a differentiated multi-brand retail opportunity. Added Krueger, “Given the breadth of the products offered by each brand, a multibrand retail concept will be relevant globally and can be tailored to meet the regional needs and preferences of shoppers.”
Krueger also pointed out that Wolverine has proven with the 8 brands it has added over the last 15 years its ability improve each acquired brands financial performance by leveraging fixed overhead and utilizing its existing systems and processes while also galvanizing growth. Said Krueger, “While the magnitude of this transaction is certainly larger than our previous ones, we are confident in our ability to bring the PLG brands in house and help expand their growth. We have significant processes and integration experience internally and that will be very relevant to this combination.”
Meanwhile, Blum Capital Partners and Golden Gate Capital take over the long turnaround project at Payless. In 2011, Payless Domestic showed a loss of $36.3 million against a $16.2 million loss in 2010. Sales were down 12.9 percent to $459.1 million. Payless' domestic chain, which had 3,499 stores at the close of the year, has been particularly hurt by the impact of the 2008 downturn on its lower-income customers. A strategy to sell higher-priced items also wound up alienating its budget-conscious consumer. Efforts to emphasize more value-focused assortments and messaging have recently shown some progress. In the fourth quarter, Payless' traffic in the U.S. nearly flat, representing its best result in six years.
Payless International, which had 661 locations at the year's close, also had been performing well in recent years but recently has been hurt by weakness in its Latin America and Puerto Rico stores. Operating earnings in the segment fell 25.8 percent last year, to $12.8 million with sales inching up 1.5 percent to $135 million. The buyout firms also will acquire Collective Licensing International, the licensing arm that manages or owns such brands as Airwalk, Above The Rim, Vision Street Wear, Strikeforce and Clinch Gear.
“We are very pleased to be acquiring one of the largest footwear retailers in the world,” said Josh Olshansky, a managing director at Golden Gate Capital, whose past retail investments have included including Express Inc., Zale Corp. and Pacific Sunwear. “Payless is exactly the type of company in which we seek to invest – a strong brand with unparalleled global scale at an important inflection point in its evolution. We look forward to having Payless join our portfolio of great retail brands, and to supporting the leadership team as they continue the successful turnaround that is already underway.”
“Having been a core investor in Collective Brands for many years, we are excited about the prospect of continuing our relationship with the company as it moves into its next chapter, and we are very pleased to have partnered with Golden Gate and Wolverine to position these businesses for future success,” said David Chung, a partner at Blum Capital. Doug Dossey, a managing partner at Blum Capital, added, “We are excited about the prospects of Payless and look forward to working with the management team to support the turnaround strategy put in place last year. At closing, Payless will be well capitalized with a strong balance sheet and have the financial flexibility to take advantage of its numerous growth opportunities both domestically and overseas.”
The transaction is subject to customary closing conditions, including anti-trust clearance, and the approval of the Collective Brands' shareholders.
