ROCKFORD — Two decades of merger experience have prepared Wolverine World Wide Inc. for the biggest acquisition in the company’s history and one of the largest and most complex deals ever in the footwear industry.
The Rockford, Mich.-based footwear company’s role in the $2.0 billion acquisition of Collective Brands Inc. should yield considerable growth for the company that makes Hush Puppies and Merrell shoes. Company executives proudly claim the transaction, which was finalized last Tuesday, makes Wolverine the third-largest footwear company in the world, trailing only Nike Inc. and Adidas AG. The acquisition is expected to add $1 billion in annual sales to Wolverine’s top line in 2013, pushing its total revenues to more than $2.5 billion.
But some on Wall Street and in the footwear industry are wondering if Wolverine will be able to pull off an acquisition this large. The deal will create a new level of complexity as Wolverine works to simultaneously integrate the acquired operations of Collective Brand’s Performance + Lifestyle Group (PLG) and its four brands: Sperry Top-Sider, Saucony, Stride Rite and Keds. And for the first time in memory, Wolverine will find itself heavily leveraged with the mountain of debt required to pull off the “transformational” transaction that will vault it to the upper echelon of global shoe companies.
“We’re a pretty conservative Midwest company,” Wolverine CEO Blake Krueger told MiBiz. “For years, we’ve operated with basically no debt and a pretty large cash surplus, but this was obviously such a strategic opportunity for us. So we made the decision to make a break from our past mode of operating.”
That break has given pause to some on Wall Street.
“Without a doubt you have integrated smaller brands successfully in your portfolio,” said analyst Diana Katz from Lazard Capital Markets on a conference call with the company, but she and others asked how Wolverine would be able to handle the integration of such a large acquisition. In fact, many analysts are taking a “wait and see” attitude about this deal, said Michelle Tay, business editor of industry trade publication Footwear News.
“The fact that Collective Brands went for so much money — and that Wolverine had to take on debt to complete the deal — shook up the industry,” she said.
Filling white space
While there are questions, few argue with the strategy behind the deal, which saw Wolverine partner with two private-equity firms on the complex bid.
From a strategic standpoint, the PLG acquisition gives Wolverine added size and negotiating power, as well as expanded retail distribution and entry into new market segments such as kid’s and athletic footwear. The PLG brands, which are sold primarily in the United States, should see tremendous benefit from Wolverine’s international sourcing and distribution networks, as well as its disciplined approach to financial management.
“The dovetail strategic fit for us is almost perfect,” Krueger said. “They’re brands we know intimately, formerly as some direct or indirect competitors of ours. We know that we can help them accelerate their current growth path.”
The first acceleration pedal is international. Less than 10 percent of PLG’s footwear sales come from markets outside the United States. The Sperry brand, for example, is one of the most popular casual shoe brands domestically with an estimated $330 million in annual revenues, but only 4 percent of its sales come from outside of North America.
By comparison, Wolverine marketed nearly two-thirds of its units in international markets last year, and international revenues accounted for more than 40 percent of total revenue.
“Our international scope is still really one of the envies of the industry,” Krueger said. “After 50 or 60 years, operating with different cultures, promoting and growing brands on a global basis — it’s kind of in our DNA now.
“So we know we can take these (new) brands international and give them some pretty immediate global mass and global extension.”
There’s also tremendous upside for improving PLG’s profit margins, which are about 40 percent lower than what Wolverine earns, Krueger said.
“We can win just by improving their profitability up to our levels,” Krueger said. “We’re pretty good operators as a company and consistently deliver healthy profit margins. We can bring them up to our profitability level over time.”
Wolverine should also see benefits. With the addition of the four PLG brands into its portfolio, the combined company expects to sell 100 million pairs of shoes and units of apparel per year around the globe — up from the 52 million units Wolverine sold in 2011. The company’s collective mass will allow it to get better pricing from its suppliers, and its increased volume will help spread out logistics costs, Krueger said.
“It immediately makes you important to everyone, and by everyone, I mean the factories that make footwear around the world,” he said. “At 100 million pairs a year, we carry a very large collective pencil.”
The acquisitions also fill “white space” in Wolverine’s portfolio, giving it entry into markets where it lacked a significant presence — children’s, athletic and women’s footwear, in particular — and a significantly larger footprint of company-owned retail stores. Krueger expects Wolverine’s existing brands to benefit by gaining immediate entry into the “better-grade” domestic children’s footwear market through Stride Rite’s 300 retail stores.
That’s a market where Wolverine had “pockets of success” but never really had the infrastructure to make a significant play, Krueger said.
“It’s a different business,” he said. “(The stores) will also give our existing brands’ children’s business access to factories (and) product development expertise that we frankly didn’t have in sufficient depth before.”
PLG’s retail stores will effectively double Wolverine’s retail sales as a percentage of revenue from 7 percent to 14 percent from brick and mortar stores and e-commerce websites, it said in a filing with regulators. Following the acquisition, Wolverine will operate about 425 stores, mostly in the United States.
“In today’s world, we believe you need to control a certain percentage of your destiny at your own retail,” Krueger said. “It brings you closer to the consumer. It lets you present your brands in the best possible way and actually creates a healthier wholesale business.”
Complex deal, easy debt
Wolverine has already cleared a significant hurdle with the transaction: getting it done. The company announced the acquisition had cleared last week, two months later than originally anticipated and more than a year after Collective Brands first put itself up for sale.
“It was about the longest process I’ve heard of in recorded M&A history,” Krueger said with a laugh.
Collective Brands first put itself on the market in August 2011, after shopping itself quietly for a few months. Wolverine had reportedly been eyeing the footwear brands “for a long time,” according to an industry source, but was not interested in the Payless ShoeSource retail business. The company and its advisers recruited two private equity firms with retail portfolios to make the deal happen. The group decided to bid for CBI together and divide the respective businesses. While it sounds simple, the three-party“club bid” aspect of the transaction added a layer of complexity, said attorney Tracy Larsen of Barnes & Thornburg LLP, which represented Wolverine. Negotiating terms among the three parties and Collective Brands, and the subsequent need to obtain audited financials on the pieces of the Collective Brands business created the bulk of delays, he said.
In the final transaction structure, Wolverine acquired the PLG brands and business for about $1.24 billion, while two San Francisco-based investment firms, Golden Gate Capital Opportunity Fund LP and Blum Capital Partners LP, jointly acquired the remaining portions of Collective Brands, Payless ShoeSource and Collective Licensing International.
“We were able to end up with the brands we wanted and not touch the Payless business, which is an entirely different kind of lower-market business,” Krueger said.
The transaction required Wolverine to take on approximately $1.3 billion in long-term debt, which was raised through a bank syndicate, and an offering of corporate notes. The company secured a $1.1 billion credit agreement with a syndicate of 20 banks, including JP Morgan Chase, Wells Fargo Bank, Fifth Third Bank and PNC Bank. The company also offered $375 million in senior notes, which will be used to fund the purchase and pay off PLG’s debts.
The notes offering was oversubscribed, said Krueger, attributing the demand to a strong national market for corporate debt as well as the company’s track record as an operator.
“I think the strategic fit, the strategic story, our reputation for being pretty consistent and good operators of the business sold very well,” Krueger said. “We had a very high confidence level.”
Proven track record
Based on Wolverine’s track record of acquiring and integrating brands and operations over the past 18 years, the confidence may be well placed. Founded in 1883, Wolverine operated with just three main brands — Wolverine, Hush Puppies and Bates — for most of its existence. Beginning in the early 1990s, though, Wolverine began to license and acquire other brands, starting with a license with Caterpillar Inc. for CAT Footwear in 1994 and, later, the acquisition of the Merrell brand in 1997. A year later, Wolverine acquired the global license for the Harley-Davidson footwear brand. Beginning in 2003, the company ramped up its pace, licensing Patagonia and acquiring Sebago, Chaco and Cushe.
Every one of them has been successful, Krueger claims.
“We tend to be a pretty disciplined team when it comes to acquisitions and brands. When you look at our history with Sebago, with Caterpillar, with Harley-Davidson and with many of our other acquisitions, every one of those has been a success story. Frankly, (that) is unusual to have a period of sustained successes over a period of years.”
The poster child of that successful acquisition strategy is Merrell. The company acquired Merrell from the Outdoor Division of Sports Holding Corp. for $17 million in cash in 1997. The prior year, Merrell had sales of approximately $27 million. Today, “Merrell’s well over $500 million in sales,” Krueger said.
“When we acquired Merrell, it wasn’t a very big brand, and it wasn’t a very good business,” he said. “When we were able to plug and play that into our international distribution network, we were able to get some fairly accelerated growth.”
The parts of their sum
Wolverine’s management plans to use the same playbook for integrating the PLG brands.
While the size does far eclipse any other deal in Wolverine’s history, the integration process will be based around the parts rather than their sum. The four individual brands that make up the acquisition are of a size that Wolverine is used to digesting, he said.
“Although this is a big business … you have to also remember it’s comprised of four different brands. These are all brands of a size we currently have,” Krueger told analysts in a conference call.
The CEO argued that Wolverine does have experience integrating brands the size of the individual PLG brands, which in 2011 ranged in revenues from $80 million (Keds) to $335 million (Stride Rite). He said the company can successfully integrate the PLG business by using the company’s usual formula: “time, people and effort.”
“There is always risk,” Krueger told analysts. “It probably always takes more time and effort than you think going into it, but we are pretty good at execution.”
Wolverine also had an insider’s perspective on the PLG business. About six months before the acquisition was announced, Wolverine hired Mike Jeppesen, who served as Collective Brands’ senior vice president of design and sourcing from 2005 to 2011. Having Jeppesen on board helped in the acquisition because he ran PLG’s operations and sourcing and was familiar with its brand leaders.
“We’ve been trying to lasso him for years and were fortunate to do that six months or so before the acquisition was announced,” Krueger said, cracking a smile. “He’s made huge contributions already to our company.”
Off the deal path
The final driver of the company’s integration strategy is focus. While the company has built its business through a series of acquisitions and brand licensing agreements, it knows it will have to step back from the hunt for other deals and pour all its effort into integrating the PLG business.
Because the companies shared a similar culture and because the acquisition process has gone on for so long, Wolverine’s executives estimate the PLG business will be fully integrated into Wolverine by the end of the calendar year.
“There are certainly some projects and some information services that will roll on into 2013, but in a lot of areas, the integration will be substantially complete this year,” Krueger said.
With the company taking on significant financial burden, Wolverine will be out of the acquisition market for about two or three years as it pays down its debt.
“This acquisition and our existing business are going to generate a lot of cash. Obviously, we’re going to first use that cash to invest back in our brands, but then we’re going to take the cash that’s generated and pay down the debt,” Krueger said. “But we’ll always be out there looking for niche brands, maybe a smaller bolt-on acquisition. After a couple of years, we’ll certainly be in a position to consider a larger acquisition.”
Krueger does admit that there is one thing that keeps him up at night related to the massive acquisition.
“The thing that really keeps me up is trying to prioritize all the opportunities in front of the company right now,” he said. “When you look across our existing portfolio of 12 brands, the global opportunities for these four (newly acquired) brands, the fact that our company has become a one-stop shop for international distributors and retailers, the collective power of these 16 brands…(is) almost unlimited.
“For me, right now, and the management team, it’s really a question of prioritizing our efforts, time and resources.”