Financial Update: Anemic Quarter for Deals

Only 10 mergers and acquisitions involving multichannel merchants were announced during the fourth quarter of 2006, compared with 13 the previous fourth quarter. “It’s anemic in terms of deals,” says Craig Battle, managing director of Princeton, NJ-based investment bank Tucker Alexander, which tracks transactions for Multichannel Merchant.

Five of the 10 deals involved private equity buyers. “What we’re seeing is a continuation of the private equity guys going after the big companies of scale with national and international brands,” says Battle, who adds that “there aren’t a lot of small and medium-size catalogs going onto the market. The only reason I can think of is performance hasn’t lived up to where they think their company should be. The market is pretty disciplined and small, and midsize companies aren’t commanding big multiples, unless they’re very profitable and growing. You can’t get much more than five or six times EBITDA. So people aren’t selling.”

Dick’s hits the links

When: November The facts: Dick’s Sporting Goods, a $2.6 billion retail chain based in Pittsburgh, agreed to buy Eden Prairie, MN-based cataloger/retailer Golf Galaxy for $225 million, or $18.82 a share. That’s a premium of 19% above Golf Galaxy’s closing price on Nov. 10. Golf Galaxy operates 65 stores as well as a Website and a catalog, though direct sales accounted for only about 2% of its $250 million in revenue for the 12 months ended Aug. 26. Last year Golf Galaxy acquired $24.5 million cataloger/retailer GolfWorks for approximately $4 million in cash and 150,000 shares of stock valued at about $4.5 million. “The play here [for Dick’s] was to pick up a specialized, fast-growing dominant player in an attractive niche where they can use their substantial financial resources and help that company grow even faster,” Battle says. The skinny: Founded in 1997, Golf Galaxy increased its revenue roughly 50% last year and anticipates similar growth this year, with plans to open at least 16 more stores in fiscal 2007.

Lab Safety adds to its stable

When: November The facts: A division of $5.5 billion industrial distributor W.W. Grainger, Lab Safety Supply agreed to acquire Hauppage, NY-based Professional Inspection Equipment and Construction Book Express, direct marketers of tools, instruments, and reference materials for building and home inspection. The two businesses had annual sales of more than $20 million. “This an example of a large cataloger diversifying its customer base into a targeted service sector,” Battle says. The skinny: Lab Safety will maintain Professional Inspection Equipment and Construction Book Express as independent brands. The company adhered to the same strategy with its other acquisitions, including Rand Materials Handling Equipment, which it bought last year; towing-equipment supplier AW Direct; agricultural maintenance supplies mailer Ben Meadows; and workwear and shop maintenance supplies merchant Gempler’s.

Ripplewood digests Reader’s Digest

When: November The facts: New York-based private equity firm Ripplewood Holdings entered into a definitive merger agreement to acquire Pleasantville, NY-based Reader’s Digest Association (RDA) for $2.4 billion. The purchasing investor group includes the J. Rothschild Group, GoldenTree Asset Management, GSO Capital Partners, Merrill Lynch Capital Corp., and Magnetar Capital. The flagship of RDA is 85-year-old Reader’s Digest, the world’s top-selling magazine, with 50 editions in 21 languages and a global readership of about 80 million. RDA also owns more than 20 other magazines and online portals, including Reiman Publications, whose properties include the Country Store catalog business. Despite its revenue of $2.4 billion, RDA has been in the red for the past two years; it lost $117 million for the fiscal year ended June 30, 2006. “Reader’s Digest is a world-renowned company that is having problems,” Battle says. “Ripplewood likes to take companies that need revamping… They’ve got the money and the experience and a world-renowned brand. They must’ve done their homework. It’s a pretty ambitious acquisition. I can’t believe they can’t fix it.” The skinny: Hopefully Ripplewood will have better luck with RDA than it apparently had with catalog Lillian Vernon Corp., of which it had acquired a majority stake in 2003. The new owners were reportedly unable to reverse the revenue slide, however, and Lillian Vernon was sold to Sun Capital Partners three years later.

4Q 2006 CATALOG INDUSTRY TRANSACTIONS
Company Market segment Buyer/investor Investment form Est. price (in millions)
OCT. Yankee Candle Co. Candles and home decor Madison Dearborn Partners Acq. of assets $1.400.0
Haband Co. Apparel Golden Gate Capital Corp. Acq. of assets N/A
NOV. Winterthur Museum Gifts and home decor BlueSky Brands Licensing N/A
National Wildlife Federation Gifts and home decor BlueSky Brands Licensing N/A
Venus Swimwear/WinterSilks Apparel Golden Gate Capital Corp. Acq. of assets N/A
Golf Galaxy Golf equipment Dick’s Sporting Goods Acq. of assets $225.00
Reader’s Digest Association Publishing, home decor, and gifts Ripplewood Holdings Acq. of assets $2.400.0
Prof. Insp. Equip. & Const. Book Express Construction tools Lab Safety Supply Acq. of assets N/A
DEC. Hanover Direct Apparel and home decor Chelsea Direct Merger N/A
Best to You Christian-themed gifts Christian Book Distributor Acq. of assets N/A
Source: Tucker Alexander, compiled from public information and other nonconfidential sources

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