Leonard Green Continues Sporting Goods Play –


Target: The Sports Authority (TSA)

Price: $1.3B (37.25 per share)

Buyer: Leonard Green & Partners

Seller: Shareholders

Financial Advisor: TSA: Merrill Lynch; Buyer: Banc of America Securities

Fairness Opinion: Merrill Lynch

Leonard Green & Partners’ recent agreement to acquire The Sports Authority Inc. for approximately $1.3 billion (or $37.25 per share) is, in a roundabout way, the next chapter of an investment that the private equity firm initiated more than 13 years ago.

Step back to Sept. 1992, when Los Angeles-based Leonard Green acquired the retail chain Thrifty Corp. from Pacific Enterprises. In addition to being comprised of 602 Thrifty Drug Stores, the retail chain also owned Gart Brothers Sporting Goods, a 49-store sporting goods retailer, which was included in the transaction.

Less than a year after the Thrifty acquisition, Gart Brothers had expanded its store base to 58 retail locations. The company’s success spurred Leonard Green to spin it out from the Thrifty platform in 1994. The standalone entity was renamed Gart Sports Co.

In 1998, Leonard Green took Gart to the next level, backing the retailer’s acquisition of publicly-traded Sportmart Inc., increasing its location base to 123 stores in 16 states and making it the second-largest full-line U.S. sporting goods retailer behind The Sports Authority. Subsequent to that transaction, Gart began trading on the NASDAQ under the symbol GRTS, with Leonard Green controlling about 61% of its outstanding shares.

Later that same year, Gart made a reach for the top, offering to acquire 70% of The Sports Authority for $445.2, or $20 per share. That offer, however, was ultimately rejected and no talk of a Gart/Sports Authority deal would be mentioned for another five years. In the meantime, however, Gart acquired another rival retailer, Oshman’s, in 2001 for $84 million. The Oshman’s deal reduced Leonard Green’s ownership stake in Gart to 44 percent.

Then in Feb. 2003, the tables turned for Gart when The Sports Authority made a successful bid to acquire it in an attempt to bolster its standing against competing big-box outlets like Wal-Mart. By then, Leonard Green, which voted in favor of the transaction, owned about 25% of Gart’s outstanding common shares, and that number was subsequently reduced to approximately 8% of the combined company, according to reports.

Back To 2006

Fast-forward to the present, and you’ll find that The Sports Authority-the number-one sporting goods retailer in the U.S.-runs 398 locations and reported total sales of $1.77 billion for the 39 weeks ended Oct. 29, 2005. The Englewood, Colo.-based company currently trades on the New York Stock Exchange under ticker symbol TSA.

In accordance with Leonard Green’s agreement to acquire The Sports Authority, which is scheduled to close sometime in the second quarter of this year, the retailer has until Feb. 13, to conduct a market test “to ensure that the transaction is the best available for our shareholders,” according to the company. Calls placed to Leonard Green & Partners were not returned by press time.

Bank of America N.A. and TCW/Crescent Mezzanine have provided commitments for the debt portion of the deal. Equity will come from the $1.85 billion Green Equity Partners IV LP fund, which was raised in 2003.

To date, analysts have expressed mixed feelings about the possible outcomes for The Sports Authority (TSA) deal.

“While we believe this deal is positive for TSA shareholders, we would not be surprised if the final purchase price was somewhat higher than the current bid,” said John Shanley, an analyst at Susquehanna Financial Group. He noted that the impetus for his opinion is that the $37.25-per-share purchase price marks a “relatively small” 20% premium over the company’s day-prior to the agreement closing price of $31.05.

Meanwhile, David Magee, a managing director at SunTrust Robinson Humphrey, said that the $1.3 billion purchase price (including the assumption of debt) is “fair”, noting that there is only a “slight to moderate” chance that another private equity firm would step in with a competing offer.

Leonard Green’s previous success in the sporting goods market is likely going to help it with this transaction. Aside from its experience with Gart, Leonard Green also owned Big Five Sporting Goods, which, incidentally, was also acquired in 1992 from Pacific Enterprises in a deal separate from the Thrifty/Gart transaction.

In 2002, Leonard Green IPOed Big Five at $13 per share, and held a secondary offering in 2003, pricing shares at $18.12 each. As of press time, Big Five (NSDQ:BGFV) shares were trading at $21.50, while Sports Authority shares were selling for $36.72.

Leonard Green & Partners was founded in 1989. The firm typically targets equity investments between $50 million and $250 million in each of its companies. According to its website, Leonard Green is the largest private equity firm in Southern California managing approximately $3.7 billion of private equity capital.