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Commentary: There's an upside to this fiasco

December 3, 2007

Psst. Come closer. Want to double your money? I've got a deal for you. No guts? Turn the page now.

OK, you didn't turn the page-Finish Line Inc. stock closed Nov. 26 at $2.94 a share. It's time to buy.

Finish Line is a leader in the outdoor and lifestyle footwear, active wear and accessory field. Basically, the company sells shoes. It has 693 Finish Line stores, mainly in enclosed malls. It also operates nearly 100 Man Alive urban-apparel stores.

Last summer, Finish Line announced plans to acquire Genesco Inc. for $1.5 billion. Genesco complements the products of Finish Line but, in terms of number of stores, it is almost three times as large. (Genesco was the company that cashed out Indianapolis entrepreneurs Scott Molander and Glenn Campbell when it purchased Hat World Corp. in early 2004.)

Due in part to an unexpected second-quarter loss of $4.2 million reported by Genesco, the acquisition has not been applauded on Wall Street. To complicate matters, Finish Line reported a second-quarter loss of its own of $1.8 million. Finish Line stock was punished. It began to plunge from its 52-week high of almost $15.

Once an ardent suitor, Finish Line turned cold on the Genesco deal, expressing shock over what it calls a material adverse change in Genesco's financial position. Genesco, feigning innocence, insists upon a closing. Court battles are raging in more than one venue. UBS Financial Services Inc., bankers for Finish Line, entered the fray, arguing that it is no longer required to provide financing for this transaction. UBS is using the "f" word (fraud), charging Genesco executives decided to unload their company because they knew it was in a tailspin. As the drama escalated throughout the fall, Finish Line stock continued to fall faster than the leaves of an Indiana maple tree.

Until recently, the Genesco strategy of obstinacy and aggressive litigation had little downside. The game has changed. Genesco recently announced it received a subpoena from the U.S. attorney for the Southern District of New York, which has begun a probe of UBS' fraud allegations. In response, Genesco CEO Hal Pennington stated the allegations are groundless and said he will continue to press for a closing. Pennington has to be shaking in his sneakers.

Finally, there is a compelling reason for Genesco to negotiate an end to this imbroglio. Now that all parties are under duress, the odds of a settlement have shot up along with the upside potential of Finish Line stock. Finish Line is more likely to reach an agreement to either pay a ransom and walk away or renegotiate the price for Genesco. Either scenario would cause Finish Line stock to rebound robustly.

At $2.94 per share, the price of Finish Line stock has almost fully discounted the downside risk. A reasonable worst-case scenario would require Finish Line to close the Genesco deal at the agreed-upon price of $54.50 a share. The Street does not subscribe to that possibility. Genesco closed Nov. 26 at $29.98. If that were to occur, however, bet on Alan Cohen, Finish Line CEO, to succeed.

Cohen earned an undergraduate degree in business and a law degree from Indiana University. At Broad Ripple High School, he was a fine athlete. Cohen is a competitor. He has navigated Finish Line through treacherous retail waters and, with other major shareholders, built a significant operation while maintaining a clean balance sheet. Under Cohen's leadership, I do not anticipate further deterioration of Finish Line stock.

Is there a community responsibility to support a homegrown company? Perhaps. Indianapolis can ill afford to add another company to the list of lost headquarters. That aside, investment in Finish Line entails a reasonably low downside risk and strong upside potential. Although the investment is risky, it is a reasonable financial play.

Got the guts?



Maurer is a shareholder in IBJ Media Corp., which owns Indianapolis Business Journal.To comment on this column, send e-mail to mmaurer@ibj.com.
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