MERGERS AND ACQUISITIONS

Third quarter gets busy In the wake of dot-com fever, catalog M&A activity heats up After a sluggish start to the first half of 2000, it looks like merger and acquisition activity in the catalog industry is on the rebound. According to Princeton, NJ-based investment bank Tucker Alexander, 19 deals were consummated during the third quarter – the same number of deals orchestrated during the first and second quarters combined.

During the third quarter, buyers and sellers began to jump back into the M&A pool “really for the first time since September 1999,” says Craig Battle, a principal at Tucker Alexander. Merger and acquisition activity among catalogers began to subside after the dot-com mania during the last quarter of 1999, when the Internet was all that investors wanted to hear about.

“M&A [in the traditional direct marketing sector] became a buyers’ market, which may have turned off sellers,” Battle says. But now that a number of formerly high-flying dot-coms have crashed, more investors are looking to acquire or invest in companies with strong direct marketing fundamentals.

For instance, in July jewelry, gifts, and tabletop cataloger/retailer Ross-Simons sold a majority interest to New York-based private investment firm Freeman Spogli & Co. for an undisclosed sum. The $250 million Ross-Simons includes jewelry and gifts cataloger/retailer Geary’s, which it bought nearly three years ago. Cranston, RI-based Ross-Simons, which does 67% of its business through its catalogs, 25% through its 11 stores, and 8% via the Internet, will grow to nearly $300 million by year’s end, predicts president Darrell Ross.

Buying as well as selling For the most part, catalogers were less the object of investments than the company doing the investing. “Many added new or existing product lines to their core business,” Battle says.

In September, Dallas-based business-to-business athletic supplies cataloger Collegiate Pacific acquired the assets of Hartford, CT-based soccer goal manufacturer Funnets. Also in September, Collegiate Pacific bought Kesmil Manufacturing, which makes athletic equipment for use in schools nationwide. The deals will enable Collegiate to expand its product line and distribution networks both domestically and internationally. Such expansion, in turn, should help fuel Collegiate’s goal of 40%-60% internal growth, says chairman/CEO Michael Blumenfeld.

A number of the acquisitive catalogers this quarter bought other catalogers. Wilmar Industries, for instance, paid $213.9 million for rival b-to-b maintenance supplies marketer Barnett; K+K America added food service supplier Hubert Co. to its stable of catalogs, which include Conney Safety Products and C&H Distributors; spices cataloger Spices Etc. bought hot-sauce purveyor Mo Hotta Mo Betta.

And although you might think that the venerable W. Atlee Burpee Seed Co. had a lock on the gardening market, in July the Warminster, PA-based company acquired $1.75 million plants cataloger Heronswood Nurseries. Its goal: to enable Burpee to branch out into the perennial plant market – proof that even established household names can be eager to expand.

Of course, the acquisition enables Heronswood to expand as well. “Burpee will handle the business end, allowing us to continue operating the nursery as we always have,” says Robert Jones, a cofounder of Kingston, WA-based Heronswood. “The deal will give us the capital to increase inventory and introduce new plants to the trade.”

The quarter also featured two reunions of sorts. In August, teen apparel marketer Delia’s merged with its own Web subsidiary, iTurf, creating a company called Delia’s iTurf. The $86 million stock deal allows New York-based Delia’s iTurf to improve its bottom line by eliminating duplicate positions and taking advantage of economies of scale and Internet expertise.

Then in September, Latrobe, PA-based Kennametal acquired the assets of metalworking tools supplier JLK Direct Distribution. Kennametal initially spun off JLK in June 1997.

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MERGERS AND ACQUISITIONS

Skittish second quarter M&A activity up just slightly Mergers and acquisitions activity was nearly as subdued during the second quarter of the year as in the first. Just 11 deals involving print or online catalogers were completed in April, May, and June, according to New York investment bank Gruppo, Levey, and Co., compared to eight deals in the first quarter.

“In the period between March and April, there was a disruption in the marketplace that may have left some serial acquirers feeling a bit uneasy about making acquisitions,” says Harry Chevan, a principal with Gruppo, Levey. Chevan says that investors became more selective about pouring money into new ventures amid a string of dot-com failures, such as Framingham, MA-based online toy marketer Toysmart and apparel marketer Boo.com.

But online jitters weren’t enough to stop one of the quarter’s biggest deals. In April, New York-based children’s publishing and media company Scholastic bought Danbury, CT-based children’s book publisher Grolier from Lagadare of France for $400 million. The acquisition provides Scholastic with Grolier’s strong presence in libraries and on the Web. Grolier, an online and print publisher of children’s reference materials and encyclopedias, brings a $270 million direct-to-home business, including $4.5 million in Internet sales. Chevan says the Grolier acquisition should aid the launch next year of Scholastic.com, a Website aimed at parents. The new company will have combined sales of $1.8 billion.

Another Web-based deal was InsiderStreet.com’s $40 million acquisition in common stock of Reno, NV-based HardwareStreet.com in May. Combined, the companies will run a new wholly owned subsidiary called e-Biz Street. The deal will make E-Biz Street one of the top 10 computer products and services e-tailers. Along with its sister companies, AMS Systems and ClubComputer.com, HardwareStreet.com had revenue of more than $40 million in 1999. E-Biz Street’s target markets include government and small and midsize businesses.

Distributors that bought catalog businesses also made headlines during the quarter. Fairfield, NJ-based Square Two Golf, a manufacturer of women’s golf equipment, acquired Tampa, FL-based women’s golf apparel marketer Lady Fairway, which sells women’s golf shoes, gloves, and socks. “Our plans are not merely to preserve the Lady Fairway brand but to expand it further through Lady Fairway’s existing channels [catalog and Internet], which will enable us to build on the Square Two brand,” says Douglas Buffington, president/chief operating officer of Square Two. The company intends to fold Lady Fairway’s Tampa marketing and operations into Square Two’s.

International activity On the international front, French cataloger/retailer Pinault Printemps-Redoute (PPR), the parent company of New York-based apparel and home goods catalog marketer Brylane, in May purchased the remaining shares it did not already own in office products retailer Guilbert for $87.8 million. PPR now holds more than 98% of the voting rights in Guilbert. PPR made this deal fresh off its first-quarter acquisition of Surcouf, Europe’s largest computer store.

And in a deal that solidifies ActionLeisure as the leading motorcycle parts and accessories cataloger in the U.K., the company in June acquired U.K.-based fellow British motorcycle accessories marketer Motorcycle Parts Supply. Terms of the deal were not disclosed.

An all-natural deal In June, Broomfield, CO-based “healthy living” products cataloger Gaiam acquired WholePeople.com, the online natural foods division of Boulder, CO-based Whole Foods Market, which it has renamed Gaiam.com. Following the merger, Gaiam will own 50.1% of Gaiam.com; Amrion, an 80% owned subsidiary of Whole Foods Market, will own the remaining 49.9%.

Whole Foods Market president John Mackey will serve as co-CEO of Gaiam.com with Jirka Rysavy, CEO of Gaiam. WholePeople.com laid off about 188 people, says Bill Capsalis, vice president of marketing for Gaiam. “We’ve shut down the WholePeople.com Website and are redirecting traffic to our site.” Gaiam is also moving WholePeople’s inventory to its warehouse in Cincinnati.

Gaiam is now assessing how WholePeople’s customers will fit into its business model. But the company is likely to begin using WholePeople’s print catalog customer database, which was cultivated when WholePeople mailed a catalog a few months ago, Capsalis says.

Gaiam has sent WholePeople’s online customers e-mail marketing messages introducing itself. “We’re trying to win over the WholePeople customers one at a time,” Casalis says.

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