Collective Brands Seen Rising 87% With Private Equity

Collective Brands Inc. (PSS) may extract the biggest takeover premium of any apparel retailer in the world as the maker of Saucony and Sperry Top-Sider shoes lures private equity buyers.

Collective Brands, which said in August it was reviewing options to boost shareholder value, may attract interest from buyout firms and rivals such as Wolverine World Wide Inc. (WWW) when bids are due next week, according to people familiar with the process. The company, which also owns the Payless ShoeSource chain, could be worth as much as $27 a share based on the value of its separate businesses, Morningstar Inc. said.

While the 87 percent premium would be the largest of any deal in the industry worth at least $100 million, it still allows acquirers to get Collective Brands at half the price of its competitors relative to sales, according to data compiled by Bloomberg. In a breakup, an apparel company could keep the wholesale brands, which boosted sales by 25 percent in the first nine months of 2011, while a private equity firm would run the Payless chain for its cash flow, Auriga USA LLC said.

“On the retail side of the business, this seems like almost a perfect set-up for a private equity company,” R.J. Hottovy, director of consumer research at Chicago-based Morningstar, said in a telephone interview. “The wholesale brands alone would be an attractive acquisition target for any of the major branded footwear players.”

Stephanie Waugh, a spokeswoman for Topeka, Kansas-based Collective Brands, declined to comment on whether the company was soliciting bids to sell itself.

Today’s Trading

Christi Cowdin, a spokeswoman for Rockford, Michigan-based Wolverine, which owns the Hush Puppies and Merrell brands, didn’t respond to a telephone call for comment.

Shares of Collective Brands climbed 3.7 percent to $15.49 at 9:53 a.m. in New York, the biggest advance among 63 companies in the Standard and Poor’s Midcap Consumer Discretionary Index.

Payless ShoeSource Inc. became Collective Brands after acquiring Stride Rite Corp. in August 2007. Its retail operations, which included about 3,800 Payless ShoeSource outlets in the U.S. last fiscal year, accounted for 80 percent of revenue, according to data compiled by Bloomberg. The rest came from its wholesale business, which supplies Saucony, Sperry Top-Sider, Stride Rite and Keds shoes to retailers.

After plunging 71 percent from its all-time high in May 2007 and reporting same-store sales declines for four consecutive years, Collective Brands said on Aug. 24 that it would review “a full range” of alternatives. In the same span, the S&P Midcap Consumer Discretionary Index fell 10 percent.

Relative Value

The decision came two months after Matthew Rubel resigned as Collective Brands’ chairman and chief executive officer.

With the deadline for bids due by the end of January, according to a person familiar with the process who wasn’t authorized to speak publicly, Collective Brands’ stock ended at $14.94 yesterday, or 0.26 times its sales on a per-share basis. Bidders may pair up later in the process, the person said.

At that valuation, the company was cheaper than any apparel retailer with a market capitalization greater than $500 million, data compiled by Bloomberg show.

The company could get a takeover offer of as much as $27 a share, or $1.6 billion, using a sum-of-the-parts analysis, according to Morningstar. The wholesale business alone could command $1 billion, or about $100 million more than the retailer’s market capitalization yesterday, according to a note last week from Hottovy.

A price of $27 a share would represent an 87 percent premium to the stock’s average price over the last 20 trading days, according to data compiled by Bloomberg.

‘Interesting Purchase’

Even at that level, Collective Brands would still be valued at a 52 percent discount to revenue. That compares with 0.96 times for the median apparel retailer worldwide, the data show.

“Fundamentally the company has not been performing well,” Timothy Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group in Bedford Hills, New York, said in a phone interview. Still, while the stock is discounted “for a reason,” it “does represent significant value. This could be an interesting purchase for private equity,” he said.

A buyout firm could acquire the retail business and close more money-losing stores to boost profitability, according to Claire Gallacher, an analyst for New York-based Auriga. Collective Brands lost almost 13 cents on each dollar of sales in the three months ended October, Bloomberg data show.

Facing competition from shoe departments at retailers such as Target Corp. (TGT) and Wal-Mart Stores Inc. (WMT), the company already said last year that it will close almost 500 “under-performing and low-volume” stores in the next three years.

‘Slash and Burn’

“You just slash and burn and get rid of the stores that are underperforming and then suddenly you have a business that’s generating revenue, that’s healthy,” Gallacher said.

Christopher Svezia, an analyst at Susquehanna International Group LLP in New York, says Collective Brands’ almost $400 million in net debt may deter some buyout firms from paying up for its assets. It already had 4.3 times more debt than earnings before interest, taxes, depreciation and amortization in the last 12 months, the highest level among apparel retailers greater than $500 million, data compiled by Bloomberg show.

“If the private equity firm is accessing the debt markets to capitalize this, it becomes even intensely more levered,” he said in a telephone interview. “It remains a head scratcher in terms of how this looks three years from now.”

Collective Brands could still make sense in an acquisition if a private equity firm teamed up with one of Collective Brands’ competitors such as Wolverine and split the company into pieces, according to Morningstar’s Hottovy.

Sales at Collective Brands’ wholesale unit jumped 25 percent in the first nine months last year, according to a regulatory filing, versus a 16 percent increase for Wolverine.

“It’d just be a matter of leveraging new brands” through Wolverine’s distribution network, Hottovy said. The retail unit “is a dream scenario for a private equity company getting it at an attractive valuation,” he said.

To contact the reporter on this story: Charles Mead in New York at cmead11@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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