Options sparse for Finish Line as dubious deal nears close:

September 17, 2007

Finish Line Inc. officials are mum these days, but you can be sure they're exploring every option they can imagine to avoid closing on the acquisition of Tennessee-based Genesco Inc., at least at the $1.5 billion price they'd agreed to pay.

Trouble is, they may not have an out, said John Shanley, an analyst with Susquehanna International Group LLP in New York City.

"As far as we can determine, the deal they signed with Genesco is pretty ironclad," Shanley said. "It most likely is going to go through."

Finish Line, you'll recall, agreed to the all-cash acquisition in June-before credit markets slid into disarray, before stock markets tumbled, and before both companies rolled out surprisingly bad summer sales figures.

It was an audacious acquisition in any environment. Finish Line planned to rely nearly entirely on borrowed money to fund the purchase of a company with twice its stock market value.

Now, it's downright scary. If the deal closes unchanged, the unraveling of credit markets will force Finish Line to pay as much as 13-percent interest on some of its debt. Shanley figures Finish Line's total annual outlay for interest payments will approach a whopping $170 million.

If Finish Line can't handle it, the company-which historically has had a pristine balance sheet-could careen into bankruptcy.

Finish Line is in this pickle in part because it had to pay a rich price to snag Genesco, which operates shoe retailer Journeys, Hat World and other mall chains. Also chasing Genesco was Finish Line's fiercest rival, New York-based Foot Locker. Both firms saw Genesco as a means to diversify away from the topsy-turvy athletic shoe and apparel business.

But because it sealed the $54.50-ashare purchase with all cash, Finish Line has less wiggle room than if it had used some of its stock as currency. If Genesco shareholders were receiving a portion of the purchase price in stock, they'd have an interest in making sure the acquisition left Finish Line on strong footing, since they'd want to see those shares increase in value over time.

Instead, they have no stake in Finish Line's fate. As a result, they are sure to gleefully approve the sale when they vote Sept. 17. The real question is whether Finish Line can figure out a way to find relief before the deal is set to close next month.

Finish Line played its first cards Aug. 30. Just hours after Genesco reported a $4.2 million quarterly loss, the Indianapolis company issued a press release saying it was "disappointed" with the results. "Consistent with its responsibilities to The Finish Line's shareholders, the company is evaluating its options in accordance with the terms of the merger agreement."

Analysts say Finish Line was trying to draw Genesco back to the negotiating table by suggesting it would walk away otherwise. The merger agreement gives Finish Line that right if Genesco experiences a "material adverse" change. It's one of the few outs for the Indianapolis company in the pact.

But applying that here would be a stretch, said Shanley, who has had M&A attorneys review the language in the agreement. He said Finish Line would have a stronger case if it and Foot Locker were not experiencing similar problems or worse. Finish Line this month reported a 4.7-percent decline in quarterly same-store sales. The company in late August said it would take $21 million in charges to shutter its 15-store Paiva chain, which catered to affluent women.

Also apparently lacking an out, Shanley said, is UBS Securities LLC, which before credit markets soured signed a "commitment letter" to provide Finish Line up to $1.6 billion in financing for the deal.

But many investors already have given up on the deal. Genesco stock now trades for around $46-more than $8 less than Finish Line agreed to pay.

"If the deal does go through, you can make an easy [$8]," observed Thomas Kirchner, a portfolio manager for the Pennsylvania Avenue Event-Driven Fund in an interview with TheStreet.com.

On his personal blog, Kirchner said he thinks it will close. But he didn't rule out another scenario: Finish Line brass' successfully lobbying Genesco executives for a price break, even though they have no financial incentive to give one. He noted that Genesco executives have lucrative golden parachutes that entitle them to plump payouts after a sale, even if the price ends up somewhat lower than they negotiated.

"Even though we think Finish Line has no real argument for getting out of the merger agreement, or even making a case for a lower price, it is far from certain that Genesco's management will be firm," Kirchner wrote.
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