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Finish Line's cash hoard could make it alluring target

May 25, 2013

You have to hand it to the senior executives of The Finish Line Inc. They’ve made the Indianapolis-based athletic chain into a cash-generating machine.

The company is debt-free and has amassed $227 million in cash on its balance sheet. That works out to $4.63 per share and represents well over 20 percent of the company’s $1 billion in stock market value.

That dry recitation of numbers might not mean much to most of us. But to the legions of private equity firms that play the leveraged buyout game, it makes for an extremely alluring target.

Private equity buyers like to put in as little cash as possible while ratcheting up the debt of the firms they acquire—a strategy that’s easiest to execute when a target starts with a pristine balance sheet.

Finish Line has the capability to stash away even more cash. In the latest fiscal year, it drew from cash to pay $12 million in quarterly stock dividends and to buy back $89 million in outstanding stock.

For Finish Line, “what really stands out is their massive cash balance,” independent analyst Alan Brochstein wrote in a report this month that tabbed the company as one of six retailers “ripe for LBO.”

Analysts say private equity activity is heating up in retailing, thanks to continuing dirt-cheap borrowing costs and the presence of a large number of stable chains that, for various reasons, haven’t seen their stocks surge as much as the overall market.

Finish Line shares are up a respectable 14 percent in 2013, compared with 16 percent for the S&P 500. But the performance is more disappointing over the last 12 months—a span when Finish Line stock slid 2 percent and the S&P advanced 25 percent.

Analysts say the credibility of Finish Line’s management took a hit in late 2012 when the company had to pull the plug on a new website and fall back on legacy technology. The company also stumbled by investing in iPads for store staff, then concluding mobile devices made more sense.

Missteps in e-commerce are leading to a “share donation” to Finish Line’s archrival, Foot Locker, Canaccord Genuity analyst Camilo Lyon said in a report this spring.

Added Sterne Agee analyst Sam Poser: “It continues to appear that [Finish Line] is juggling too many balls at once, which is allowing its largest competitor to take share.”

Analysts say a shift in consumer preferences toward basketball shoes and away from running shoes—Finish Line’s most important product—has added to the challenge.

All this is happening at a time Finish Line is beginning to roll out a huge new partnership with Macy’s that will include opening 450 athletic-shoe shops inside the department store’s locations.

There’s lots of upside to the deal, analysts said. But successfully executing won’t be easy, they say, and a financial payoff from the new initiative won’t materialize overnight.

That potential for stronger performance down the road would be attractive for private equity buyers. Their playbook calls for purchasing underperforming businesses, boosting their profits, then flipping them for a tidy profit.

There’s a big caveat to all this—it’s not clear that Finish Line’s management and board would have any interest in entertaining LBO overtures. In response to an inquiry from IBJ, company spokeswoman Dianna Boyce said in an email, “We do not comment on these kinds of speculative questions.”

Of course, suitors don’t have to have permission to make a play for a company. But going hostile for Finish Line would be tricky, given that current management has a cozy relationship with Nike, whose products account for 69 percent of the chain’s merchandise purchases. A deal that Nike didn’t bless likely would be a nonstarter.

Even so, speculation about an LBO is unlikely to go away. In 2012, the apparel and shoe sectors had 38 private equity transactions with a total value of $5.7 billion, the most since 2007, Bloomberg data show.

And buyouts may accelerate in 2013, Joshua Schachter, a money manager at Pennsylvania-based Snow Capital Management, told Bloomberg.

“There’s a lot of cash on the sidelines from private equity that needs to be deployed,” he said.•

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