No, it’s not time for the NBA finals, but rather the combination of two leading sporting goods retailers, The Sports Authority and Gart Sports.
In a deal billed by company executives as a "merger of equals" announced Thursday, Englewood, Colo.-based Gart and Fort Lauderdale-based Sports Authority signed a definitive agreement to merge in a deal that would create a $2.5 billion sporting goods chain with 385 stores in 45 states. All stores would operate under The Sports Authority nameplate.
Underscoring the multiregional impact of the merger, Sports Authority chairman and chief executive officer Marty Hanaka exclaimed on a morning conference call: "We don’t have to worry about not having the Yankees in the World Series anymore. This company will celebrate a championship every season in one of our towns. We will always win the Super Bowl."
Under the terms of stock swap agreement, which is subject to regulatory and shareholder approval, TSA’s stockholders will receive 0.37 Gart common shares for each of their Sports Authority shares, about a $67 million stock transaction based on TSA’s current 11.9 million shares outstanding. At the close of the transaction, the new company would have approximately 25 million diluted shares outstanding. Gart’s and TSA’s shareholders each will hold about 50 percent of the combined company. The agreement contains no mechanism for adjusting the stock swap in the event of broad fluctuation in stock prices.
TSA will take a one-time restructuring charge of between $100 million and $120 million following consummation of the merger, expected during the third quarter. The parties estimated the combined company will have annual earnings before interest, taxes, depreciation and amortization of $187 million.
Hanaka will serve as chairman of the combined company, which will be called The Sports Authority Inc., but will be headquartered in Gart’s hometown of Englewood. Douglas Morton, president and ceo of Gart, will serve as vice chairman and ceo of the combined company. Elliott Kerbis, president of TSA, will become president and chief merchandising officer of the new entity. Thomas Hendrickson, chief financial officer of Gart, will retain that title in the combined company and serve as chief administrative officer. It is expected to be traded as TSA, Sports Authority’s current ticker symbol, on the New York Stock Exchange.Investors voiced their approval of the deal by sending Sports Authority shares up 63 cents, or 11.4 percent, to close at $6.14 in New York Stock Exchange trading Thursday, while Gart shares advanced $1.54, or 10.3 percent, to close at $16.48 on the Nasdaq.
Richard Nelson, an analyst at Stephens Inc., said the deal "makes sense" because it combines more than simply geographically dissimilar operations. Gart, he noted, does a great job with softlines and TSA does a better hardlines business.
John Shanley, managing director for Wells Fargo Securities, said, "This is really going to put the kibosh on any regional chains going public. There will be very limited interest from the investor community with such an East-West powerhouse. What this will signal is the rapid escalation of combining a lot of other chains."
Hanaka said the merger "really does create a national sporting goods retailer. Between the two of us, we will have 385 stores in 45 states with about $2.5 billion in sales. That should give us the economies of scale we need to do what we want moving forward."
Redundant operating and advertising costs would be eliminated, expecting to result in pretax savings of more than $20 million in fiscal 2004, $40 million in 2005 and $50 million annually after that, the parties forecast. Marketing savings could be reinvested to strengthen the overall brand, reaching more customers every week.
Hanaka said, "If you look at footprints of both companies, there is very little overlap. They are very complementary."
As a result, the company anticipates only a modest number of store closings. Some stores will be relocated and some will close. In addition, TSA plans to add 20 new stores in 2003 and another 20 in 2004 and expects to have net new store growth in those two years. It also said it expects to absorb personnel from the store closing in neighboring stores.
Hanaka also noted that the merger will allow TSA "to leverage Gart’s winter sport expertise, which is something we at TSA had envied for quite some time.
"The bottom line is this will create the preeminent sporting goods retailer in the space," Hanaka asserted. "Our hardline expertise and Gart’s winter sport softline expertise make a potent combination."For Morton, the opportunity to create a true national brand, "where consumers move from market to market and recognize the combination of the powerful assortment, brand and pricing will give them confidence in the brand in the future."
Both companies have enjoyed four years of earnings improvement. After losing money in 1999, TSA has seen earnings per share grow to 30 cents in 2000, 48 cents in 2001 and 68 cents in 2002. At Gart, earnings jumped from 23 cents in 2001 to $1.86 last year.
The combination of distribution networks should also speed goods to market. The two firms have distribution centers in Southern California, Colorado, Texas, Illinois, Georgia and New Jersey.
"Almost every store in the company will be within a day delivery period from one of the company’s distribution centers," Morton said. "That is very important from a replenishment standpoint and from the ability for the company to deliver product quickly and up front."
The new TSA would immediately be a dominating force in a highly competitive market place, which generates about $75 billion in retail sales and about $46 billion at wholesale, the company said. In addition, sporting goods are highly fragmented with a third of the business going to mass merchants, 9 percent to the Internet, 12 percent to specialty stores, 24 percent at big-box sporting goods stores and 22 percent at traditional sporting goods stores.
For the most part, athletic manufacturers said they were pleased with the deal, though a few aired concern about how the new company’s massive buying power would play out. They also worried about the likelihood of even greater demands being placed on vendors.
Tim Boyle, ceo of Columbia Sportswear, said, "It will be a real positive for both companies. They’re quite synergistic and the amalgamation will be good."
Alden Sheets, president of Puma’s worldwide apparel, said, "I think it’s great. It will be interesting to see how such a big conglomerate will operate."
Still, there’s a bit of a culture clash between the two firms. Nathan Gart, a newspaper carrier for The Denver Post, founded Gart in 1928 with $50 in fishing rod samples, and the company was known for its homespun service for years. TSA, on the other hand, is widely known for its mall-based stores and big-box stores with somewhat of a cookie-cutter approach. The chain, originally a start-up venture of Kmart Corp., opened its first store in November 1987 and became a public company through an initial public offering in 1994.Sheets said, "It all comes down to how do you get people in the store? They’ll learn as department stores have learned you can’t do it all by price."
George Horowitz, president and ceo of Everlast Worldwide, said, "Merging the two businesses makes all the sense in the world. They will save a lot of money. This morning we reviewed their orders and they buy similarly. Their buying power and their own [private label] programs should be even better."
Carol Hochman, president and ceo of Danskin, said she thought the deal makes "perfect sense" for the retailers. "It’s going to create a very powerful resource in the sporting goods industry," she added. "We feel confident that we have a strong relationship with The Sports Authority and look forward to working with the new entity. The collective power of that pencil is going to be pretty big in proportion to the industry."
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