DSW’s Largest Shareholder Becomes Its Subsidiary

DSW Inc. has merged with its largest shareholder, Retail Ventures Inc., to streamline its corporate structure and look more attractive to investors.


The Columbus, Oh.-based retailer said Tuesday that RVI has divested its 62 percent stake in it, effectively ceasing to be a public company and turning into a wholly owned subsidiary of DSW.


This was done via a merger agreement in which both companies exchanged shares. Each RVI share was paid for with 0.435 shares of DSW.


The move is expected to generate significant value for DSW, RVI and their respective shareholders.

Apart from a simplified corporate structure, DSW expects increased liquidity in the trading of its shares on the market, a potential reduction in the number of DSW shares outstanding and the utilization of significant analog and tax credits.


“The relationship between RVI and DSW has been a source of confusion and uncertainty in the marketplace since DSW went public in 2005. Although there is nothing operationally difficult about the way in which DSW and RVI interact, the complex corporate structure itself is difficult for many to understand and that no doubt has deterred some investors from investing in DSW,” said Michael MacDonald, president and CEO of DSW, in a call with analysts Wednesday morning.


The transaction also eliminates the public company expenses associated with RVI, whose only operating business while it was listed was its majority stake in DSW. Meanwhile, RVI shareholders will effectively become direct shareholders of DSW, which also raised its earnings outlook Tuesday.


“Investors will be pleased,” said Scott Krasik, analyst at BB&T Capital Markets.

“One, DSW will have major financial flexibility with more than $300 million in cash and investments and no debt. Two, the public float will increase as current RVI shareholders receive DSW shares. Perhaps most importantly, assuming DSW settles RVI’s debt in cash (in lieu of shares), the diluted share count will be reduced by approximately 10 percent resulting in about 30 cents in annualized EPS accretion,” Krasik added.


Indeed, the announcement caused shares of DSW to spike 15 percent in Wednesday morning trading.


DSW now expects to earn between $2.38 and $2.42 per share for fiscal 2010, after considering that charges associated with the merger transaction with RVI impacted EPS by roughly 5 cents.


Net sales for the fourth quarter ended Jan. 29, 2011 increased 16 percent to $468.5 million, while net sales for the full fiscal year advanced 14 percent to $1.82 billion, the company added.

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