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Payless Shoes Seen Accepting Lowest Apparel Valuation: Real M&A

Payless ShoeSource is poised to sell itself for less than any apparel retailer in America, which may be the best price it can get.

Collective Brands Inc. (PSS), owner of the discount chain and the Saucony and Sperry Top-Sider brands, is expecting offers at the end of April that will value the company at $20 to $22 a share, people familiar with the matter said last week. While the range is more than double Collective’s price since it began reviewing its options in August, a buyer would get the retailer at a 62 percent discount to sales, according to data compiled by Bloomberg. That’s less than any of its publicly traded rivals.

Collective, which had a record loss last fiscal year, is attracting interest from South Korea’s E-Land Group, Brown Shoe Co. (BWS) and private-equity firms, the people said, after fourth- quarter same-store sales rose the most in more than two years. While Collective’s wholesale unit also boosted sales 24 percent last year, potential buyers would have to take on the retailer’s debt, which exceeded a half-billion dollars. Collective would then cost more relative to earnings than any U.S. apparel retailer deal on record, the data show.

An offer of $20 to $22 is “the right price given what the company’s doing now,” Bill Kavaler, a special situations analyst at Oscar Gruss & Son Inc. in New York, said in a telephone interview. “Making progress takes time.”

Stephanie Waugh, a spokeswoman for Topeka, Kansas-based Collective, declined to comment on how much the company could be worth in a sale.

Stride Rite, Keds

Payless ShoeSource Inc. became Collective Brands after acquiring Stride Rite Corp. in August 2007. Its retail operations, which included about 3,500 Payless ShoeSource outlets in the U.S. last fiscal year, accounted for about 80 percent of revenue, according to a company filing with the Securities and Exchange Commission. 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 straight years, Collective said on Aug. 24 that it would review “a full range” of alternatives to boost shareholder returns.

Over the same span, the S&P Midcap Consumer Discretionary Index fell 10 percent.

While no final bids have been made, the price range of $20 to $22 a share is higher than Collective anticipated in August, said the people familiar, who asked not to be named because the discussions are private.

Potential Bidders

E-Land has indicated to Collective it will put in a solo bid to acquire the whole company and hasn’t given a price, said one of the people. St. Louis-based Brown Shoe also has indicated it will bid, most likely with Cerberus Capital Management LP, said one of the people.

Ro Byung Gyoo, a spokesman for E-Land, declined to comment on whether the company plans to submit a final offer, bid jointly with other partners or what it might pay. Peggy Reilly Tharp, a spokeswoman for Brown Shoe, wasn’t immediately available to comment. A representative from New York-based Cerberus declined to comment on whether the private-equity firm will bid for Collective.

Collective’s shares have already rallied 88 percent to $19.33 yesterday since the company initiated its review in August and announced an effort to revive flagging sales at Payless. It included shuttering 475 under-performing stores, implementing brand-loyalty programs and changing the product mix to focus more on lower-priced items.

‘Bearing Fruit’

Same-stores sales, or sales at outlets open more than one year, grew 1.6 percent at the company’s U.S. Payless stores in the fourth quarter and 1.7 percent overall, the most since 2009, the company said.

“You’re starting to see some of these things bearing fruit,” Christopher Svezia, senior analyst for Susquehanna International Group LLC in New York, in a telephone interview. Susquehanna owns shares of Collective Brands. Still, “at the end of the day Payless is a very mature business, it’s not a growth business.”

Svezia said a takeover price of $22 or $23 a share “makes some sense.”

Collective’s sales are projected to rise 2 percent in the current fiscal year and 4 percent the following year, according to data compiled by Bloomberg.

At yesterday’s closing price, Collective was valued at 0.34 times its sales in the fiscal year ended in January, the lowest among publicly traded apparel retailers with a market capitalization greater than $1 billion, according to data compiled by Bloomberg. A $22 per-share offer would value Collective at about 0.38 times sales, still the lowest among its peers, the data show.

Debt Drag

While Collective’s stock is trading at the cheapest among rivals relative to sales, the company’s $610 million in borrowings make it more expensive by other measures.

Taking net debt into account, Collective’s $19.33 closing price yesterday valued the company at 14.2 times earnings before interest, taxes, depreciation and amortization, compared with the median 8.68 times for peers and also higher than the median 9.22 Ebitda multiple on U.S. apparel retail deals greater than $500 million, according to data compiled by Bloomberg.

Collective’s debt load is “a hold back, it’s definitely a negative,” Patrick McKeever, an analyst at MKM Partners in Stamford, Connecticut, said in a telephone interview.

Given the revival in demand at Collective’s Payless outlets, the company may still justify a higher price, according to Dorothy Lakner, an analyst at Caris & Co. in New York.

Gaining Traction

Collective’s earnings for its fiscal first quarter, which ends at about the same time that final bids are expected, could sway the company’s decision on price, she said.

“Why would management simply accept what to me looks like a relatively lowball offer in the low 20s if on their own they were beginning to do better?” Lakner said.

The average 12-month stock-price estimate of $19.50 among analysts who cover Collective, less than 1 percent above its current price, suggests a lower valuation for the company.

“Something north of $20 is aggressive, but certainly within the realm of possibility,” McKeever at MKM said. Still, “I just don’t see a quick or easy fix for Payless. You have to weigh that pretty heavily in valuing the company.”

To contact the reporter on this story: Katia Porzecanski in New York at kporzecansk1@bloomberg.net; Lauren Coleman-Lochner in New York at llochner@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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