Financial Update: Strategy Drives Second-Quarter Deals

Strategic add-ons accounted for most of the 17 industry mergers and acquisitions that occurred during the second quarter. Marketers as diverse as educational supplier Aristotle Corp., golf equipment cataloger/retailer Golfsmith International, and computer reseller Zones bought companies (Haan Crafts Co., Zevo Golf, and Corporate PC Source respectively) that enabled them to fill gaps in their product line or to expand upon, without straying from, their core business.

Although the quarter produced three fewer deals than the second quarter of 2002 and 14 fewer than the second quarter of 2001, M&A activity appears to be heating up. The reason: It’s a buyer’s market. Craig Battle, managing director at Princeton, NJ-based investment bank Tucker Alexander, notes that many of the acquiring companies, including teen marketer Alloy, medical, dental, and veterinarian supplies cataloger Henry Schein, industrial supplies marketer Airgas, and paper products manufacturer/marketer Taylor Corp. bolstered their marketing efforts by acquiring companies at a great price.

CATALOG AGE’S DEALS OF THE SECOND QUARTER

Lillian Vernon Sold

When: April

What it means: We’d be remiss if we didn’t cite the sale of Lillian Vernon Corp., even though you’re no doubt aware of the fact. So in brief: The 52-year-old catalog was sold to a private equity fund managed by New York-based Ripplewood Holdings and New York-based media management firm ZelnickMedia. The company sold for $60.5 million at $7.25 per share in cash — representing a 73% premium over Lillian Vernon’s $4.20 closing market price of the common stock on April 15.

Among the tasks the new buyers face is turning around the financial fortunes of the beleagured franchise. For the fiscal year ended Feb. 22, Lillian Vernon lost $18.6 million on sales of $238.0 million. In fact, the last time the company turned a profit for the fiscal year was 2000.

The skinny: Ripplewood also sees potential in branding opportunities. To wit, on July 23, the venerable cataloger partnered with franchise network of embroidery and personalization provider Hometown Threads via the shelves of six Wal-Mart stores. (See “Lillian Vernon Weaves its Way into Wal-Mart,” page 8.)

In the Swim Buys Poolside Express

When: April

What it means: By acquiring the assets of Montgomery, IL-based Poolside Express, West Chicago, IL-based discount pool supplies cataloger In the Swim capsizes a rival. In the Swim has sales “approaching” $50 million; Poolside Express’s sales are less than $10 million. Svoboda, Collins, a $150 million Chicago-based private equity fund focused on investing in service and value-added distribution companies, owns a majority of In the Swim. “Poolside was for sale, and it was a competitor, and therefore it made sense to make the acquisition for growth,” says Patrick Goff, an analyst with Svoboda, Collins.

The skinny: Poolside, which mailed its final catalog last fall, closed its operations on April 1 — the day the sale was completed — and both its Website and toll-free phone line began channeling customers over to In the Swim’s site and toll-free line.

Henry Schein Bolsters Medical, Dental Units

When: May, June

What it means: After laying low for 17 months, Melville, NY-based Henry Schein is back in acquisition mode. In May it bought the dental distribution operations of Duisburg, Germany-based Hager Dental GmbH, a transaction that places Schein among the top dental distributors in Germany. Several weeks later, Schein bolstered its medical supplies business by picking up $40 million Los Angeles Colonial Surgical in an all-cash transaction. Colonial manufactures and markets examination gloves to dental practitioners. “Acquiring Colonial’s business significantly increases our sales of an important product line within the critical asepsis control product category and brings to Henry Schein relationships with thousands of new customers,” Schein chairman/CEO/president Stanley Bergman said in a statement.

The skinny: Disparate though the two acquisitions seem, the companies had the right pricing, strategy, and culture that Schein requires of its acquisitions. They also meet Schein’s requirement of offering a pretax internal rate of return of 15%-20% immediately accretive to earnings.

NEBS Acquires Safeguard

When: April

What it means: Dallas-based Safeguard Business Systems will help Groton, MA-based mailer New England Business Service augment its own printed and promotional products business. NEBS, which also designs and embroiders products and distributes through catalogs, the Web, and field sales representatives, paid $72.5 million cash for Safeguard Business Systems. Founded in 1956, Safeguard counts 600,000 customers in the U.S. and Canada.

The skinny: The Safeguard acquisition is already paying dividends. NEBS’s total sales for the fiscal year ended June 28 increased 7%, to $142.5 million; without SafeGuard, total sales would have dropped 3%.

SECOND-QUARTER 2003 CATALOG INDUSTRY TRANSACTIONS
Company Market segment Buyer/investor Investment form Est. price (in millions)
APRIL Poolside Express Pool supplies In the Swim Acq. of Assets N/A
Panache Home decor American Pacific Acq. of assets $0.2
Lillian Vernon Corp. Gifts and home decor Ripplewood Holdings Majority investment $60.0
Corporate PC Source Technology products Zones Acq. of assets N/A
Safeguard Business Systems Office products New England Business Service Acq. of assets $72.5
MAY Delia’s Corp. Youth apparel Delia’s management Minority investment $2.7
Zevo Golf Golf equipment Golfsmith International Acq. of assets N/A
OCM Direct College supplies Alloy Acq. of assets $15.6
G. Neil Cos. Human resources supplies Taylor Corp. Acq. of assets $34.7
Gaylord Direct Library supplies Demco Acq. of assets N/A
Hager Dental Dental supplies Henry Schein Acq. of assets N/A
Delta Safety Supply Industrial products Airgas Acq. of assets N/A
Custom Nutrition Services Nutritional supplements Drugstore.com Acq. of assets $5.3
Bluefly.com Apparel Soros Private Equity Partners Add’l majority investment $1.0
JUNE Rexall Sundown Nutritional supplements NBTY Acq. of assets $250.0
Colonial Surgical Medical supplies Henry Schein Acq. of assets N/A
Haan Crafts Corp. Institutional craft supplies Aristotle Corp. Acq. of assets N/A
Source: Tucker Alexander, compiled from public information and other nonconfidential sources

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