Out-of-towners are charging into Indianapolis to scoop up another one of our marquee companies. It’s an oft-told story, but this time it might just have a happy ending.
Finance experts say Los Angelesbased investment firm Freeman Spogli & Co.’s purchase of an 80-percent stake in H.H. Gregg may position the electronics-and-appliance chain to grow faster than if it remained a familyowned company.
Under the deal, veteran investment banker Robert Shortle said, “You still have the company headquartered here, the vast majority of management, and a sophisticated owner with one goal-to grow it and make a lot of money.”
Here are the nuts and bolts of the deal, as outlined in a prospectus for a $165 million bond sale planned as part of the ownership shuffle: Freeman Spogli will invest $111 million for its stake, leaving the remaining 20 percent-valued at $28 million-held by CEO Jerry Throgmartin, his son Gregg and company President Dennis May.
Cashing out will be Jerry’s father, Gerald, and Jerry’s four sisters. Those five, along with the trio who’ll remain shareholders, are slated to receive $285 million for the shares they’re selling.
At issue with H.H. Gregg, like many privately held companies, was how to continue funding growth while also satisfying the desire of outside shareholders for liquidity, CEO Jerry Throgmartin said.
While the 58-store chain could have retained its current structure and grown, he said, “the difficulty in financing it is the shareholders have to continue to reinvest, put profits back into the company and remain at risk.”
Launching an initial public offering also was an option, he said, “but in the end we wanted to partner with someone who could guide us in the capital markets, which is not our expertise. The time it would take for us to feel comfortable and be up to speed on that would have taken our focus off what we need to stay focused on.”
No doubt Freeman Spogli knows the financial ropes, as well as a thing or two about retailing. Since its founding in 1983, it has poured $2 billion into 36 companies. Big investments in the 1990s included Plainfield-based Galyan’s Trading Co. and Brylane Inc., a catalog retailer with a huge Indianapolis presence.
An obvious change for Throgmartin will be his family’s loss of absolute control. According to the prospectus, after the deal closes the Gregg board will have five members-two company executives, two Freeman Spogli principals and a retail consultant who works closely with Freeman on its retail investments.
“The Freeman Spogli people are very talented people, and they do tend to be more hands-on. Their nature is to add value by their expertise,” said David Zoba, former general counsel of Galyan’s, which had two Freeman Spogli principals and the consultant on its board when it was sold to Pittsburgh-based Dick’s Sporting Goods last summer.
The big question now is what Freeman Spogli’s exit strategy will be. Finance experts say such firms typically try to reap their profits in three to seven years. Options typically include selling to a rival, selling to another investment fund, or launching an initial public offering.
For Indianapolis, a city starved for fast-growing public companies, an IPO might have the most allure. But that avenue would only be available to the company if it’s performing well, said Shortle, co-founder of Periculum Capital of Indianapolis.
So far, 49-year-old H.H. Gregg is chugging right along. In the fiscal year that ended in March 2004, it reported profit of $28 million on revenue of $753 million, the prospectus for the bond offering shows.
Just since 1999, the company has successfully entered five new markets, going head to head in each with giant rivals such as Best Buy. Within one year of entering Atlanta in April 2003, for instance, Gregg garnered a top three market position in appliances. It started with five stores there and now has 11.
The 2,800-employee company has grown steadily as many electronics retailers flamed out and failed. Long gone are Fretter Inc. and Highland Superstores Inc., which tried to build beachheads in Indianapolis in the early 1990s. Just this month, Denverbased chain Ultimate Electronics Inc. sought Chapter 11 bankruptcy court protection.
Gregg’s secret? Unlike most national competitors, which now offer limited service, Gregg remains focused on providing superior service with fulltime, commissioned salespeople. Throgmartin says the company does so while keeping its prices in step with competitors’.
In a report, New York-based Moody’s Investors Service said Gregg’s expansions have succeeded partly because it “used a systematic approach, which includes ensuring the distribution system is in place prior to entering new markets.”
Despite the financial firepower Freeman Spogli brings to the table, Throgmartin, 50, shows no signs of abandoning that disciplined approach. He described the growth strategy as “managed” and “consistent.”
“The key is, if we expand beyond our ability to execute, that’s a bad deal for us,” he said.