Finish Line and Mergers & Acquisitions and Lids and Real Estate & Retail

Finish Line's buy praised, panned

June 25, 2007

Athletic retailer The Finish Line Inc. had cultivated a reputation for conservative play calling, keeping clean books with minimal debt.

Then on June 18, the Indianapolis-based retailer called a surprise audible. The $1.3 billion company agreed to acquire Nashville, Tenn.-based Genesco Inc. for $1.5 billion.

The move gives Finish Line an impressive stable of new store brands including Journeys and Hat World, but it also saddles the company with a lot of debt at a time sales of athletic footwear are flagging. Depending on whom you ask, the move was either a brilliant way to grow and diversify or a giant risk not worth taking.

Initially at least, investors seemed inclined to believe the latter. They punished the company's stock, sending it down 22 percent in the three days after the deal was announced. The stock closed at $9.88 June 20.

The "extraordinary" reaction from shareholders shows they're worried about a debt load that makes Finish Line one of the nation's most highly leveraged retailers, said Christopher Svezia, a footwear and athletic retail analyst at New York-based Susquehanna Financial.

After the deal, the company's debt would exceed its EBITDA--earnings before interest, taxes, depreciation and amortization--by more than five times. By comparison, Pittsburgh-based Dick's Sporting Goods Inc. has a debt-to-EBITDA ratio of about 1.1. And mall rival Foot Locker Inc.'s is even lower.

"Finish Line historically has been debt-free and conservative," Svezia said. "Here they go out and decide to do a deal, and instead of putting a toe in the water, they go full bore."

Although risky, the deal makes sense strategically, he said, partly because it keeps Genesco out of the hands of New York-based Foot Locker.

The price also is fair, Svezia said. Finish Line agreed to pay $54.50 per share, a 37.7-percent premium over Genesco's three-month average trading price. Earlier, Genesco had rejected offers of $46 and $51 per share from Foot Locker.

From a retailing standpoint, the deal is nothing short of "brilliant," said Richard Feinberg, a retailing professor at Purdue University and a friend of Finish Line President Glenn S. Lyon.

"Companies like The Finish Line, caught between big and little, have no choice but to get bigger," Feinberg said. "Yes, they're leveraging, but I believe they've done the math and the numbers add up."

The deal gives Finish Line the ability to reach more consumers and explore cross-merchandising opportunities, Feinberg said. It also gives the company more buying power with vendors and savings on administrative expenses and advertising costs. The company expects to save $15 million to $20 million in the first full year of operations.

The combined $2.8 billion company with 2,800 stores will keep the Finish Line name and remain headquartered in Indianapolis. Genesco's Hat World already is based here.

"We believe this is a winning combination," Finish Line CEO Alan H. Cohen said in a conference call with analysts.

In the same call, analysts asked Cohen whether he was concerned about the heavy debt load.

"We feel very comfortable with it," he said. "We know the combined companies will generate strong cash flow. This will allow us to fund all our growth initiatives and at the same time reduce our debt."

Many who follow the company remain skeptical, including David Meier, retail editor for investing Web site The Motley Fool.

"As I look at the data, all I can ask is: Why?" Meier wrote in a column on the site. "Why would Finish Line pursue this acquisition? How much reward is there for all of the risk it seems to be taking? I don't see it."

Meier told IBJ the risk of bankruptcy is real for Finish Line if the company can't realize operating improvements.

Svezia views the acquisition as "mixed." He expects Finish Line might spin off some of its businesses to pay off debt. Finish Line said it plans to pay $11 million in cash in the deal and finance up to $1.6 billion.

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