Wolverine Worldwide, parent company of Hush Puppies, Merrell and other brands, announced on May 1 that it has won the bidding process for the Performance + Lifestyle Group (PLG) of Collective Brands, which includes four iconic shoe brands - Saucony, Sperry Top-Sider, Stride Rite and Keds – forming what the management calls a “global footwear and lifestyle brand powerhouse” and raising its annual turnover by about $1 billion to over $2.5 billion, starting next year
This major transaction has received high praise by some of our subscribers, and also by investors. It confirms the consolidation in the industry at the wholesale level, while highlightsing the possible dangers of vertical integration when it is not carried out in a proper fashion, like for example at Bata (see our exclusive story on this company further down in this issue). Efforts by the Collective Brands' previous management to somehow integrate PLG with the Payless ShoeSource retail chain were inconclusive.
Wolverine's stock price increased by 6.3 percent to $41.95 Monday after reports that it was in line for the takeover of PLG, but it lost 4.4 percentage points after the details of the deal were announced. Apparently, some analysts were disappointed by the management's projections for future profits from PLG and worried about Wolverine's ability to finance the takeover, the second one in the sector after the acquisition of Timberland by VF Corporation last year for a similar amount. However, Wolverine's stock regained its momentum during the balance of this week, ending up at $44.06 yesterday.
Wolverine has already arranged 100 percent debt financing to pay $1.23 billion in a debt-free transaction for these operations, which were the milk cow of Collective Brands, or ten times their projected operating profit before amortization (Ebitda) for 2012. The expanded group should have combined annual Ebitda of nearly $300 million after the closing of the deal, which is expected to take place in August or September, after approval by shareholders and regulatory authorities. PLG's sales are seen rising at an annual rate of between 5 and 10 percent.
The rest of Collective Brands - consisting essentially of Collective Licensing International and the struggling Payless ShoeSource chain of shoe shops, will be taken over by two investment firms, Blum Capital and Golden Gate, as part of an overall deal worth the equivalent of about $2.0 billion, including assumption of debt.
This overall purchase price of $21.75 a share represents a 104 percent premium over the average trading price of the Collective in the 30 days before its announcement last August that it was reviewing financial and strategic alternatives, following major losses. Collective made a loss of $164.2 million in the financial year ended last Jan. 28.
Blum owns a stake of about 6 percent in Collective. Golden Gate is an active investor in various leading brands in the retail and restaurant sectors in the U.S., with stakes in the likes of California Pizza Kitchen, Romano's Macaroni Grill and Eddie Bauer and Pacific Sunwear. Both companies are based in San Francisco.
A consortium formed by Wolverine, Blum and Golden Gate reportedly won the bid for all the assets of Collective against E-Land, a large Korean conglomerate which was going to offer $1.8 billion for the whole package. This former licensee of Puma in Korea deals with about 60 different brands, including Berghaus and Ellesse, and operates some 10,000 stores in Asia. It recently bought an Italian footwear brand, Lario 1898, and two major Italian brands of women's handbags, Mandarina Duck and Coccinelle.
Wolverine said that PLG's entire management will remain in place at its head office in Lexington, Massachussets under the leadership of its current chief executive, Gregg Ribatt. He will report to Wolverine's CEO, Blake Krueger. In a conference call with analysts yesterday, Krueger said he was impressed by the quality of PLG's management, which will have an excellent cultural fit with that of Wolverine. PLG will act as an independent operational unit like Wolverine's three other existing divisions.
Through this big acquisition, which Krueger described as “transformational,” Wolverine is ending up with a rather balanced portfolio of 16 brands that target different age groups, genders and lifestyles in the casual, athletic, outdoor and work segments – all “aligned with macro consumer trends” and offering interesting opportunities for expansion and for higher profits through greater economies of scale.
In particular, Wolverine's management stressed in a conference call yesterday that the newly acquired brands offer opportunities for its existing brands in the athletic, women's, children's, casual and retail sectors. Saucony, for example, is a fast-rising brand of running shoes that can help Merrell to develop in the growing barefoot running segment. Sperry and Keds are particularly strong in the women's sector, and Stride Rite can help Wolverine's brand to develop its children's shoe offerings in terms of product development and through its own stores.
On the other hand, Wolverine can help PLG to develop more widely outside North America. Krueger stressed that the availability of “the world's preeminent collection of leading lifestyle brands” is going to make Wolverine a more desirable partner for distributors and retailers around the world. Noting that many of its foreign distributors are also retailers, he indicated that they may want to open some interesting multi-brand retail formats for some of these brands.
While the group is looking at multi-brand formats in both the adult and children's category, Krueger indicated that it is striving to get about 15 percent of its total turnover from single-brand retail stores and shop-in-shops in the future, thanks in part through a more complete range of footwear, apparel and accessories for some brands, as it is doing with Merrell and planning to do with Sebago. Its foreign distributors have about 9,000 stores and shop-in-shops. The enlarged group will have almost 300 Stride Rite stores and more than 100 Merrell stores, but only 18 Sperry stores and 10 Saucony stores.
Starting with Hush Puppies more than 50 years ago, Wolverine has been a pioneer in international development, Krueger noted. Formerly a manufacturer, the group has added eight brands to its portfolio in the last 15 years, and it has been very successful in integrating them, while keeping them distinct and rolling them out internationally. It wants to do the same thing with the additional four brands that it is acquiring.
The potential for international expansion is huge. Only 10 percent of PLG's sales are now generated outside the North America, although the company has been boosting its European staff to a total of 151 persons, 108 are working out of its European head office in the Netherlands.
At Wolverine, instead the ratio of international sales has grown to 32 percent of sales, and it is expected to grow further. In terms of volume, the ratio is even higher at 61 percent of 52 million pairs or units of merchandise. The ratio is higher in terms of volume because many of the products sold under the group's brands abroad generate lower revenues or only royalties for the group because of wholesale distribution or licensing agreements.
Sperry grew by 50 percent in 2011, but only 4 percent of its sales of $330 million came from outside North America. The brand is enjoying a very strong momentum, especially through brand extensions outside the boat shoe category and into apparel and accessories.
Similarly, Stride Rite derived only 4 percent of its 2011 sales of $335 million from international markets. Two-third of its sales are made at its own stores, whose number was trimmed last year to 312 locations, and Wolverine feels that this children's footwear brand has opportunities for more development at wholesale and through a global retail franchising program.
The international market made up 19 percent of Keds' turnover of $80 million in 2011. Wolverine is convinced that this 90-year-old brand is largely underdeveloped, considering its strong heritage, its accessible price points and the fact that vulcanized shoe styles are in fashion.
Saucony, which has become the number three brand in the U.S. specialty running circuit, made 23 percent of its turnover of $270 million outside North America last year. It is growing by more than 20 percent in Europe.
Besides its international focus, other Wolverine strengths are its disciplined financial management, its strong sourcing organization and its SAP-based IT systems, Krueger said.
Some analysts agreed that Saucony could help Merrell to expand in running, but wondered whether Sperry might cannibalize Wolverine's Sebago in the boat shoe category. However, Krueger pointed out that non-boat styles have come to represent 33 percent of Sperry's sales, and 55 percent inside Sperry's own stores. While Sperry is more fashion-oriented and appealing to women, Sebago is more into men's boat shoes and more classic, he said, noting that his group has had no problems in selling work shoes under three different brands – Wolverine, Bates and Caterpillar Footwear.
Wolverine says the acquisition will have only a minimal negative impact on its profitability in 2012, but it should add between 25 and 40 cents to its earnings per share in 2013 and between 50 and 70 cents in 2014, excluding acquisition and integration costs. It is looking at synergetic costs reductions of between $6 million and $10 million a year between 2013 and 2014, mostly in sourcing.
Wolverine plans to finance the acquisition through cash and debt. The company's net debt should increase to a level equal to 4.2 times Ebitda after the closing of the transaction, but Wolverine feels that it will be able to take the ratio down to 2.2 by the end of 2014.