Brown Shoe Co. Inc. is said to be in talks to buy American Sporting Goods Corp., but analysts are undecided if the purchase will be good for the Missouri-based firm.
According to a report by Sporting Goods Intelligence, Brown Shoe may pay $150 million, which BB&T Capital Markets said is as much as 10 times the earnings potential of ASG.
ASG, the parent of Avia, Ryka and several other brands, reportedly had sales of $220 million last year and earnings in the range of $10 million to $15 million. The California-based company has been on the market since 2005, and has gone through at least two unsuccessful formal auction processes due to the relatively weak stature of its key brands in an increasingly concentrated athletic market, according to the note.
BB&T analyst Scott Krasik called Brown Shoe’s reported offer price a “premium valuation,” noting that “most recently Avia and Ryka were third-tier players in the toning revolution and based on our channel checks have been marked down aggressively for the last six months.”
Added Krasik, “In terms of total sales, market share and perception, ASG’s primary brands, Avia and Ryka, would be well below Reebok’s stature at the time of [its acquisition by Adidas in 2005], and Reebok [has been] dilutive to Adidas’ earnings every year since.”
But Sterne Agee analyst Sam Poser said the move would be positive for Brown Shoe.
“It helps them with athletic brands where they can make higher margins and relieves some pressure from other vendors. Plus, ASG owns factories in China, which — if they are part of the deal — will help with Brown’s athletic production [for brands] such as for Dr. Scholl’s,” said Poser, adding the deal “is instead potentially negative for Skechers.”
When contacted, Jerry Turner, CEO of American Sporting Goods, did not confirm or deny that he’s talking to Brown Shoe.
“The company is on the market. It’s been on the market. It’s no secret,” he told FN. “To go beyond that is all conjecture on everybody’s part. We’ve talked to a variety of people, and we’ll continue to talk to a variety of people.”
Brown Shoe declined to comment. The company earlier this month announced that it restructured its credit agreement to extend its revolving credit facility to Jan 7, 2016, lower its interest rate by 50 basis points, as well as provide for less restrictive covenants and more flexibility.
As at Oct. 30, 2010, Brown Shoe had cash and cash equivalents totaling $29.7 million, long-term debt of $150 million and borrowings of $113 million under its revolving credit agreement.