Perseus and Nike in New Classic –

Enthusiasts of the classics may have seen the deal coming, but for those in the private equity world, Perseus LLC’s successful sale of Converse to Nike Inc. took many by surprise. Most thought the company was headed for the public markets, to sit side by side with Nike both on store shelves and on the ticker tape. However, as Converse was waiting for an opening in the market, Perseus worked out a deal to sell the sneaker maker to its chief competitor in a sale that gave the firm a complete, and monetarily successful, exit.

For Perseus, the turnaround of Converse began with the acquisition of the company out of bankruptcy in April 2001. The firm purchased the business for $117.5 million, and through the bankruptcy, was able to get a fresh start for the sneaker maker, which had saddled itself with an oppressive debt load. “They had made some poor acquisitions, and the company, prior to bankruptcy, was overlevered,” Perseus Managing Director Chip Newton said. “They were really scrambling [with the debt load] and had some retail and manufacturing operations that were not particularly competitive…All those were left behind in the acquisition.”

Perseus named a new management team upon the deal’s close, installing Marsden Cason as chairman and Jack Boys as CEO, both coming to Converse from North Face, where the pair instituted a dramatic turnaround of the outdoor apparel and equipment maker. Other investors in Converse included Cason’s Infinity Associates and Union Overseas Holdings.

Once the new management team was in place, the company went to work on reestablishing its spot in the cutthroat sneaker market. “We revamped Converse’s sales force, restructured all of the agreements with the company’s top accounts, and set up new [manufacturing] relationships in China and other countries. It took a lot of convincing, but we were able to assure them that Converse was a company that was here to stay,” Newton says.

A Storied Past, But…

Assuring manufacturers and retailers that Converse would indeed be around for the long haul was not necessarily an easy sell for Perseus. While the company’s Chuck Taylor and Weapon sneakers belong in the pantheon of basketball footwear, Converse’s more recent past could probably be equated to stepping in gum with a new pair of shoes.

Prior to Perseus’ investment, intense competition between the sneaker makers, including Nike, Reebok and Adidas, led Converse to take a risk by signing then Golden State Warrior Latrell Sprewell as a spokesman. The move soon backfired, when Sprewell was suspended for choking his coach at a basketball practice. This, however, was only one of many missteps for Converse, including the doomed acquisition of Apex One, an athletic clothing maker, that ultimately put too much stress on the company’s finances.

Despite the trouble that Converse endured, the new management team still felt the business could be saved. “When we were looking to buy the company, one of the primary attributes that attracted us was the strength of the Converse brand,” Newton said. “It’s got a heritage that’s iconic in the basketball arena, and any time you can buy a brand like that, you sit up and take notice.”

And it was this brand awareness that enabled Perseus to turn the company around and ultimately sell it. However, there was a little assistance from hip-hop fashion mogul Sean “P Diddy” Combs, who inspired the “throwback” fashion trend. A short time thereafter the company’s Weapon sneakers could once again be found in a premier placement in athletic apparel stores, while Converse’s enduring Chuck Taylor’s are now featured in lavish commercials hawking the sneaker as beyond “old school,” and coining the brand as “first school” among basketball shoes.

“Converse was probably more a beneficiary of the return-to-retro trend than pioneer, but we certainly did as much as we could around it,” Newton said.

For the conspiracy theorists, Converse company also had another push helping the company’s prospects, and there has been some speculation that its keen eye toward the future may have made the company even more attractive to Nike. In June 2002, Converse filed with the United States Patent and Trademark Office to use the phrase “King James” on its apparel and sneakers. While seemingly innocuous at first glance, “King James” is the nickname of Nike’s newest poster child, Lebron James, a star basketball player for the Cleveland Cavaliers, who signed a $90 million sneaker contract with Nike earlier this year. Newton, however, denied knowing of any connection between the two occurrences.

Sprinting To The Exit

With the relatively quick turnaround in place at Converse, Perseus began looking for liquidity; the first place it looked to was the public markets. “At this point, we knew the investment was successful, and we wanted to access the capital markets to help the company continue to grow,” Newton said.

The firm initially filed to float Converse in an $86 million IPO in December 2002, but skittishness in the public markets leading up to the War in Iraq led Perseus to hold off on the launch. “After we had filed to go public, we contacted a limited number of select strategic acquirers, and Nike came through with an attractive offer,” Newton said.

The Nike offer was valued at $305 million, in addition to the assumption of working capital liabilities and $19 million of net debt. For Nike, the Converse acquisition gave the sneaker giant an opportunity to expand on its retro offerings and also served to offset potential weakness in its Nike brand of footwear.

Perseus, meanwhile, was able to achieve a return of roughly 4.5 times its gross equity investment, and realized an internal rate of return of between 85% and 90 percent. While the sale certainly provided a sound exit for Perseus, Newton said it was the due diligence that went into the initial acquisition that helped spur the return. “The key for us in this deal was buying the company correctly,” he said. “We were able to put in a proven management team that played a critical role in the due diligence, and once we bought the company we hit the ground running.”