SKX Wheels & Deals

NEW YORK — The fate of Skechers USA Inc.’s proposed acquisition of Heelys Inc. will likely come down to price.

So said analysts and market watchers, who largely agreed last week that Skechers $142.8 million offer to buy the Dallas-based maker of wheeled footwear would be a positive for both firms. For Skechers, the company could easily leverage its existing infrastructure to grow the Heelys product and add to its revenue stream. Heelys, under the umbrella of a much larger firm, could benefit from Skechers’ marketing prowess, potentially take new product risks and — as a division of Skechers — be protected from the burden of its own financial woes.

The question comes down to how much Skechers is willing to pay and how much Heelys, which is still dealing with the fallout from an overinventoried situation that began last fall, feels it is worth. Last Wednesday after the markets closed, Skechers revealed an offer to pay $5.25 a share for all Heelys’ outstanding shares. That was up from a prior bid for between $4.75 and $5.10 a share — a bid Heelys had rejected after Skechers offered it on May 28.

Skechers Chairman and CEO Robert Greenberg said in an Aug. 13 letter (which was revealed in the firm’s statement from last Wednesday) that Skechers “may also be prepared to increase our proposal if increased value can be identified upon the completion of the selected and concise due diligence measures.”

Skechers management was unavailable for further comment.

In a statement provided to Footwear News last Thursday, Heelys said it “appreciates Skechers seeing the value of our company. We are assessing this offer and will respond in due time.”

Analysts generally agreed that Heelys could reject the new offer and that the bid price would then increase. But Christopher Svezia of Susquehanna Financial Group told FN, “Even if [the purchase price] goes up a little bit more, it’s still handsomely accretive [to earnings].”

Heelys shares popped 9.5 percent in trading last Thursday, closing at $5.33, 1.5 percent higher than the per-share offer price.

David Turner of BB&T Capital Markets estimates that at $5.25 per share, the deal could add 20 to 25 cents per share to Skechers’ bottom line, assuming an all cash transaction. “Financially, the deal is a homerun for Skechers if they get it done at or near the proposed bid. Anywhere above and beyond the current bid, it gets dicey [due to] the duress that Heelys is under. It hasn’t evolved beyond its cyclical roots. You don’t know what type of revenue stream you’re buying. That’s why it makes sense [for Skechers] to come out with a bid that’s not aggressive,” he said.

“[Greenberg] is a very smart guy and he may be thinking of something that we aren’t seeing right now. You never know with Robert, and what he can do,” added Sam Poser, analyst at Sterne, Agee & Leach.

But Scott Krasik of C.L. King & Associates wasn’t convinced a deal would go through. “The likelihood of a deal is less than 50/50,” he said. “Heelys is saying, ‘We’re a $5 stock with $4 [per share] in cash [on the balance sheet]. Why should we sell right now?’”

Indeed, Heelys ended the last quarter with $96.8 million in cash, and with no debt, the firm has a strong balance sheet. Its income statement is a different story, though. At its height, Heelys had annual revenues of $188.2 million in 2006. In the most recent quarter, the firm’s revenues were $18.2 million, down from $74.3 million the prior year, and it swung to a loss of $394,000 from a profit of $12.8 million.

On its Aug. 7 quarterly conference call, management said that after several promotional quarters, retail price points have returned to between $50 and $60, CEO Don Carroll said.

Following the resignation in January of its longstanding CEO, Michael Staffaroni, the firm in May appointed Carroll president and CEO, and a new CFO, Lisa Peterson, was also hired recently. Carroll acknowledged to FN in late May that the firm was in the midst of a repositioning.

“We have our work cut out for us,” he said at the time, adding that Heelys itself was keeping an eye out for acquisitions and had plans to move into nonwheeled footwear.

Heelys’ motivation for the deal could partly stem from pressure by venture capital firm Capital Southwest Corp., which may be looking to complete an exit strategy. Dallas-based Capital Southwest, which in 2000 provided the capital necessary for Heelys to complete the development and marketing of its “stealth skate shoe,” owns about 32 percent of the footwear firm’s shares, according to a recent statement of ownership filed with the SEC. Heelys went public in December 2006, raising $135 million.

Gary Martin, president of Capital Southwest, was appointed chairman of Heelys’ board in August 2007. Martin, though, could be hoping for a higher bid from Skechers, said Svezia, which would be reason for declining Skechers’ initial May offer.

Said Turner, “They’re a venture capital firm, and [venture firms] are not known for incubating companies through restructuring and turnaround. Maybe they’re motivated to sell.”

Incidentally, Greenberg revealed in a May 28 letter (also included in the Wednesday statement) that his firm’s interest in Heelys dates back nearly two years. “Skechers carefully considered a potential transaction with Heelys prior to its December 2006 initial public offering,” he wrote. The letter also noted that Heelys approached Skechers about forming a “strategic partnership” in December 2007.

— With contributions from Wayne Niemi


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