While analysts were generally upbeat on Wolverine World Wide Inc.’s acquisition of Collective Brands Inc.’s Performance & Lifestyle Group on Tuesday, investors showed concern that Wolverine can’t afford the $1.23 billion purchase price weighed on the firm’s stock price.
Wolverine’ stock closed 4.4 percent lower Tuesday afternoon, ending at $40.10. Analysts said that while the deal made strategic sense, the market is worried Wolverine may need to launch a secondary offering of its shares, which would effectively dilute existing shareholder equity.
“The higher-than-expected acquisition price and lower-than-expected initial accretion estimates weighed on shares yesterday after a recent run-up,” noted Christopher Svezia, analyst at Susquehanna Financial.
While the stock bounced back to its pre-announcement level of $41.95 on Wednesday morning, another analyst, who would only speak without being attributed, said, “The math is not working out for a lot of people. The revenue [growth] estimate makes sense, the operating income makes sense, but the accretion line was lower than expected. [How they got] from EBITDA to EPS is a mystery.”
Wolverine holds $123.3 million in cash and is expected to finance the acquisition through $1.28 billion worth of debt, financed by JP Morgan and Wells Fargo. The deal should add $1 billion to the company’s top line, and Wolverine expects accretion to earnings of between 25 cents and 40 cents a share in fiscal 2013, and between 50 cents and 70 cents a share in fiscal 2014.
When questioned by analysts on a call Tuesday, Wolverine CFO Don Grimes said the discrepancy had to do with purchase price accounting details, related especially to tangible assets and intangible assets. “In terms of doing an exact bridge between the math you guys are ticking off versus the math that we have, I can’t do an exact reconciliation of that, but I can tell you there are probably some things on the purchase price accounting that related to incremental amortization,” Grimes said.
Sterne Agee analyst Sam Poser was among those who had a lukewarm response to the deal because it was considered expensive.
“Given the size and complexity of this acquisition, we wonder if the company bit off more than it could chew. Package deals are not always good deals. While Wolverine had to take all four brands as a package, [it] is better off selling/licensing the Keds and Stride Rite businesses. Retail is not management’s expertise,” he wrote in a research note.
He added, “Upside to accretion estimates could be offset by a further downturn in the legacy business, which we view as challenged, given the decelerating backlogs and potential topping out of the minimalist trend.”