Finish Line cash hoard could draw out suitors

Finish Line Inc. has a lot going for it—not the least of which is more than $250 million in cash sitting on its balance sheet.

That growing cash hoard goes a long way toward explaining why speculation is swirling that a private equity player will step up and attempt to buy the Indianapolis-based athletic shoe and apparel retailer.

Analysts have been buzzing about future M&A activity in retail since Gymboree Corp. agreed to sell to Bain Capital for $1.8 billion last month. They say an unusual combination of economic forces could set the stage for a torrent of deal-making in the sector.

There’s no telling whether a Finish Line acquisition will materialize, of course, and a company spokeswoman declined to comment. But Citigroup Capital Markets retail analyst Kate McShane has Finish Line near the top of her list of potential leveraged-buyout candidates.

In an Oct. 12 report, she said it has all the ingredients to draw private equity suitors—it’s undervalued, has strong cash flow, no debt and the potential for a buyer to improve performance and thus bolster profitability.

“We believe Finish Line is a strong candidate for a potential leveraged buyout,” she said in the report, which estimated it could fetch $19 a share—a 22-percent premium to where the shares now trade. A deal at that price would value the entire company at $1 billion.

She and other analysts say there’s no shortage of potential acquirers. Citigroup estimates that buyout firms have $400 billion to spend, which they could parlay into $1.3 trillion through leverage. The investment firm projects private equity investors will earmark $100 billion of their cash for retail.

Wheeling and dealing had been slumbering until recently. But lately credit has become easier to come by and, because of low interest rates, it’s cheap. Global M&A activity in the third quarter spiked 21 percent, reaching the highest level since before the financial crisis.

Finish Line’s strong balance sheet could be a blessing or a curse for the company’s board and management, depending on whether they’re hellbent on keeping the retailer independent or would be willing to entertain offers.

Private equity buyers are all about making acquisitions with a minimum of their own capital—a feat they pull off partly by tapping the assets of the companies they acquire.

Finish Line now has $254 million in cash and cash equivalents. That amounts to $4.76 per share, and Sidoti & Co. LLC estimates cash will grow to $6.40 per share by early 2012.

Cash is piling up because the 667-store Finish Line chain is highly profitable, but also relatively mature and slow-growing.

The company’s board has begun to loosen its grip on the bounty. In January, it boosted its quarterly cash dividend from 3 cents a share to 4 cents a share (though the larger dividend consumes only $4.3 million a quarter). Finish Line also has been buying back shares and spent $15.8 million doing so in the fiscal second quarter, which ended Aug. 28.

But Finish Line is holding on to most of its cash so it can pounce on growth opportunities. In a conference call with analysts in September, Glenn Lyon, the company’s chairman and CEO, said one of its three strategic priorities is “investing outside of our existing business.”

Lyon said he and Chief Administrative Officer Gary Cohen are leading a team “that will identify and move forward with growth initiatives that play to our fundamental strengths as a company.”

Similar efforts in the past haven’t had a happy ending. In 2005, the company paid $12 million to buy hip-hop outfitter Man Alive. It more than doubled the store base to almost 100 outlets before unloading the perennial money-loser in 2009. In 2006, Finish Line launched an active women’s concept called Paiva and opened 15 stores before shuttering the concept a year later.

That same year, Finish Line aimed for the fences with a highly leveraged $1.5 billion bid to acquire Tennessee-based Genesco Inc., the parent of Journeys and Hat World. Finish Line later had to pay handsomely—about $40 million in cash and 6.5 million of its shares—to extract itself after Genesco’s sales fell sharply.

Given those stumbles, Sterne Agee analyst Kenneth Stumphauzer said in a report that, while he likes the company, he has “some concerns” about deploying capital into an acquisition or to launch a new retail concept.

But using cash for one of those purposes may be just what the company needs to retain its independence—a point Lyon appeared to acknowledge in an interview with IBJ in May.

“We’re not going to shy away from going that direction because of our past failures,” he said at the time. “The goal is to grow and stay ahead so someone else can’t realize more value in the company than we do.”