14 done deals in 2Q

While the 14 transactions that took place during the second quarter was an improvement over the seven deals for the first quarter of 2007, that’s down from the period last year. For he second quarter of 2006, 19 industry deals were recorded.

Most of the second-quarter deals in 2007 were strategic, says David Solomon, managing director for Goldsmith Agio Helms/Lazard Middle Market, the New York-based investment bank that tracks mergers and acquisitions for Multichannel Merchant. “We see strategic acquisitions increase in proportion toward the latter half of the economic cycle,” Solomon says.

Sun Capital snaps up more of Sharper Image

When: May The facts: Sun Capital Securities Fund Equities, a part of private equity firm Sun Capital Partners, paid Sharper Image Corp. founder Richard Thalheimer $13.78 million for his shares after he left the company. Sun Capital effectively doubled its ownership stake in the high-tech gifts cataloger/retailer with the purchase of those 1.49 million shares, making it the largest shareholder. Meanwhile, Sharper Image’s struggles continue: Annual sales for the San Francisco-based company fell 21.5% to $525.3 million, down from $669.0 million in 2005. Direct marketing revenue, which includes catalog, Internet, and infomercials, declined nearly 18%, to $160.7 million from $195.1 million. So why is Sun Capital increasing its stake in the merchant? Solomon says the private equity player has minority interests in other companies and “it gives them a very loud voice at the board level” as the largest stockholder. Sharper Image’s sales have been declining substantially, “but Sun thinks this is an opportunity.” The skinny: Sharper Image has a negative EBITDA (earnings before interest, taxes, depreciation, and amortization), a rarity, Solomon says. “They’re losing $70-$80 million a year.” But Sun must think “this is retrievable,” he says. “This is a great indication of their confidence in the business model.”

Kellwood acquires Hanna Andersson

When: June The facts: Apparel marketer Kellwood Co. acquired children’s clothing cataloger/retailer Hanna Andersson for about $175 million. Kellwood, which specializes in branded as well as private-label product, hopes the acquisition will help it reach its goal of expanding into upscale brands. The $100 million Hanna Andersson, known for its Swedish-inspired cotton kid’s apparel, “has a 5%-10% growth rate,” Solomon says. “Hanna Andersson designs and manufactures through outsourcing relationships, and sells branded products direct to consumers.” Meanwhile, Kellwood has 41 brands it sells through wholesale, “so Hanna Andersson is an aberration for Kellwood.” Kellwood’s revenue for its most recent fiscal year was $1.96 billion, and its EBITDA is $120 million. “This is a material transaction for Kellwood that really moves the needle for them,” Solomon says. “This gives them a brand they own, control, and can take it to distribution.” The skinny: “Hanna Andersson has been limited through its own distribution,” says Dermott O’Flanagan, an associate with Goldsmith Agio Helms/Lazard Middle Market. Kellwood has the shelf space with the Neiman Marcuses of the world, “and it can take Hanna through those channels.” Plus, he notes, “Kellwood can manufacture at a much lower cost.”

Bain Capital Buys Guitar Center

When: June The facts: Private equity giant Bain Capital paid about $2.1 billion to acquire Guitar Center, which has 198 Guitar Center stores, and 97 Music & Arts Center stores. Its direct division includes print catalogs Musician’s Friend and The Woodwind & The Brasswind; direct sales rose 7% to $391.7 million last year, from $365.1 million in 2005. Guitar Center is about 78% retail and 22% direct. The multiple Bain paid for Guitar Center is 12.1 times EBITDA, Solomon says. “That’s very high.” Since 2002, Guitar Center’s annual revenue growth is around 20% and same-store sales are up 6%-10% for that same period. “Musician’s Friend has been growing nicely,” Solomon says. “About 9% organic growth, which is darn good for a direct business.” Guitar Center is one of the top musical retailers “and it has revenue momentum.” The skinny: The guitar industry is growing faster than the overall economy, O’Flanagan says, at about a 5.5% rate, where piano growth is less than 1%. “They are in the right place at the right time.”

2Q 2007 CATALOG INDUSTRY TRANSACTIONS
Company Market segment Buyer/investor Investment form Est. price (in millions)
APR. Blair Corp. Apparel and home goods Golden Gate Capital Acq. of assets $150.50
Bookspan Books DirectGroup Bertelsmann Acq. of assets N/A
Ashford.com Gifts Luxi Group Acq. of assets $0.40
Buyitdirect.com Technology Bechtle AG Acq. of assets N/A
State Line Tack Pet products PetsUnited Acq. of assets N/A
MAY American Identity Apparel Staples Inc. Acq. of assets N/A
Sharper Image Corp. High-tech gifts Sun Capital Partners Acq. of assets $13.78
Edwin Watts Golf Golf equipment Sun Capital Partners Acq. of assets N/A
CDW Corp. Technology Madison Dearborn Partners Acq. of assets $6,947.26
Bass Pro Shops Fishing gear Gaylord Hotels Acq. of assets $221.98
JUN. Backcountrycorp.com Recreational products Liberty Media Corp. Acq. of assets N/A
Hanna Andersson Corp. Apparel Kellwood Co. Acq. of assets $175.00
Guitar Center Musical instruments Bain Capital Acq. of assets $2,093.42
Performance Cycling products Northcastle Partners Acq. of assets N/A
Source: Goldsmith Agio Helms/Lazard Middle Market, compiled from public information and other nonconfidential sources

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