Consolidation in the US retail footwear industry advanced another giant step late on Tuesday (22 May) with the announcement that Payless ShoeSource had reached an agreement to acquire wholesaler/retailer Stride Rite Corp for about US$800m plus the assumption of debt.

Additionally, Payless, subject to approval of its shareholders, intends to rename itself Collective Brands as a holding company that will operate three standalone business units - Payless, Stride Rite and Collective Licensing International - which will supervise the management, marketing and licensing of its portfolio of brands.

Matt Rubel, currently president and CEO of Payless, would become CEO of Collective Brands, which, like Payless, would continue to trade on the New York Stock Exchange.

Payless would retain its headquarters in Topeka, Kansas; Stride Rite its offices in Lexington, Massachusetts; and Collective Licensing its base in Denver, Colorado.

Under terms of the agreement reached Tuesday, Stride Rite shareholders would receive $20.50 per common share in cash, representing a 32% premium to Stride Rite's average stock price over the last 90 days and totalling about $800m.

The firm didn't provide a figure for the amount of debt. The acquisition would be financed through existing cash resources and committed new financing.

Stride Rite does business through ownership or licensing of brands including Stride Rite, Keds, Sperry Top-Sider, Tommy Hilfiger and Saucony. In addition to more than 300 Stride Rite stores, it does business in lifestyle and athletic branded footwear, principally through wholesale arrangements.

Payless operates more than 4,572 stores as well as a web site at www.payless.com.

"Through this acquisition and as indicated by the change in our name, we are creating a leading, innovative global footwear, accessory and lifestyle brand company that is well positioned to grow in both our key domestic and international markets," Rubel commented.

David Chamberlain, chairman and CEO of Stride Rite, pointed out: "This transaction will create substantial value for Stride Rite shareholders, provide significant supply chain efficiencies and greater resources to grow our business as a separate unit within the holding company structure, and open up new opportunities for our talented employees as part of a large and more diversified organisation."

In disclosing the agreement, the parties noted that, over the past five years, branded footwear has grown faster than either private label or designer shoes.

It also noted that Payless and Stride Rite would collectively have a 19% market share in the fast growing children's footwear segment. Additionally, it said Stride Rite is "under-penetrated" in expanding retail venues such as off-mall locations and lifestyle and outlet centres.

The deal is expected to benefit earnings in the current fiscal year and generate a compound annual growth rate in operating profit above 20% for the years 2006 through 2009. A return to Payless' pre-transaction debt leverage ratio is expected "within two to three years" of consummation.

Payless expects to continue to generate same-store sales growth in the low-single digits and foresees operating profit percentage growth in the mid-teens, the firm said.

The transaction, expected to close by the end of the third quarter, requires the approval of Stride Rite shareholders, as well as other customary conditions and regulatory approvals.

Citi and Financo advised Payless on the deal, while Goldman Sachs consulted for Stride Rite.

The agreement was announced as US equity markets closed on Tuesday.
 
By Arnold J Karr.