By  on May 21, 2007

Call it merger mania from head to toe.

Footwear brand Skechers USA Inc. and Genesco Inc., which has retail brands such as Lids and Journeys in its stable, as well as Dockers Footwear, now are emerging as the two leading targets to be taken private in the retail and footwear sectors, according to financial sources.

A buyout firm is in discussions with both companies to take them private in separate deals, sources said, indicating that the buyout firm is possibly Kohlberg Kravis Roberts & Co. Those sources also said the plan, after the two transactions are completed, is to combine the two businesses into one company. There's been some marketplace rumblings that the Skechers deal might even be contingent on the buyout firm acquiring Genesco.

Even if Genesco doesn't agree to a deal, Skechers could still be acquired in a leveraged buyout transaction. Sources on Friday said that, in addition to LBO shops, there are also private equity firms eyeing Skechers.

The acquisition share price for Skechers, which does about $1.2 billion in sales each year, could not be determined at press time. When the $1.5 billion Genesco received an offer last month from Foot Locker Inc., the proposal was about a 26 percent premium to the then trading price of Genesco shares. Skechers has been trading in the $30 range. A 26 percent premium on Skechers' stock creates a possible price tag of $37.80. However, some investors believe Skechers is undervalued. If true, the price tag could come in higher.

A spokeswoman for KKR declined comment, as did spokeswomen for Skechers and Genesco.

There have been some rumblings about Skechers as a takeout candidate since mid-March. The company sells a variety of men's, women's and children's footwear in the U.S. and internationally. Founded in 1992, Skechers is headquartered in Manhattan Beach, Calif. The company operates 144 retail stores in the U.S. through a combination of concept stores, factory outlet sites and warehouse outlets. It also has about 12 stores internationally.

Genesco is also primarily a footwear retailer, although it sells headwear and accessories, as well. The firm operates more than 2,000 retail stores in the U.S. and in Canada. The company, founded in 1924 and based in Nashville, Tenn.,said on Thursday that it is planning to close or convert 57 retail sites.

On April 23, Genesco formally rejected Foot Locker's $1.2 billion bid for all outstanding shares of the company, or $46 a share. Genesco's Hal N. Pennington, chairman and chief executive officer, said in a statement that its board "unanimously rejected the proposal and concluded that it did not reflect the long-term value of Genesco, including its strong market position and future growth prospects."

WWD first reported on March 12 that Foot Locker was preparing to bid for Genesco. At the time of Genesco's rebuff of the Foot Locker bid, a spokesman for Foot Locker said his company was hoping to do some due diligence. So far Foot Locker has remained quiet about any additional plans.

When Foot Locker's $46-a-share bid was made public on April 20, the retailer also disclosed an April 6 letter to Genesco's management that stated the dance between the two was ongoing for several months. Those months certainly gave Genesco, which it is believed does not want to be owned by Foot Locker, time to find a so-called "white knight." Sources last month said Genesco was meeting with private equity firms. Following the public announcement of Foot Locker's bid, speculation on Wall Street was that Foot Locker's next step is a proxy fight to unseat Genesco's current board. However, that would have been required to be done at the end of April. Sources in the marketplace said Foot Locker has not launched a proxy fight for board seats.

An industry source said the management teams at Skechers and Genesco have a "mutual respect" for each other, and this source believes that a merged entity of the two could be beneficial to both firms.

Still, one can't completely rule out the proposed acquisition by Foot Locker for Genesco. A bid is still on the table, although with Genesco shares trading around $49, Foot Locker likely would have to raise the offer to $50 or $51

a share.

Genesco's discussions with private equity firms meanwhile is merely just one option that is in exploration. Moreover, one also can't deny the synergies of a combined Foot Locker-Genesco entity."It still makes perfect sense for both firms," said one industry source.

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