Finish Line (FINL) Holder Clinton Group Wants Company to Explore Strategic Alternatives
A Copy of the Letter:
Alan H. Cohen
Chairman of the Board and CEO
Dear Mr. Cohen:
We greatly appreciate you and your team taking the time to discuss with us TheFinish Line, Inc. ("Finish Line" or the "Company"). As we stated, Funds andaccounts managed by Clinton Group Inc. ("Clinton") currently beneficially own inexcess of 5% of the outstanding shares of the Company.
We have invested in Finish Line because we believe the market price of FinishLine shares fails to reflect the true earnings power of the traditional FinishLine concept stores, management's ability to turnaround the recent same storesales trends, the potential for margin improvement and realization of operatingleverage and the value potential of the Man Alive and Paiva concepts. Further,we departed our meeting with a greater sense that such beliefs are indeedaccurate.
While we are supportive of management as operators of the business, we arewriting this letter to encourage your board to take immediate steps to enhanceshareholder value. Today, we choose to highlight the following as initial stepsthat the board should do to enhance shareholder value: (1) eliminate theunfriendly shareholder corporate governance structure including the dual classvoting structure, (2) commence a Dutch tender offer in conjunction with a modestsenior debt financing, and (3) to the extent the share price continues tolanguish, engage a reputable investment banking firm to explore strategicalternatives including, but not limited to, a going private transaction or anoutright sale of the Company.
PERFORMANCE HAS BEEN WEAK, BUT WE ARE CONFIDENT IN A TURNAROUND
We acknowledge that Finish Line has suffered from the merchandising missregarding low profile footwear as well as weakness in women's footwear, but wecontinue to believe in the overall earnings power of the traditional Finish Lineretail stores. We are confident in management's ability to "right the ship" andrealize both same store sales growth and continued square footage growth. Inaddition, we are complimentary of management's pursuit in diversifying thegrowth of the Company with the Man Alive and Paiva concepts, and we look forwardto better understanding their financial results.
FINISH LINE SHARES ARE UNDERVALUED
As of September 7, 2006, Finish Line's market capitalization has decreasedapproximately 37% since the beginning of the year. While the recent same storesales trends have not been strong, we believe the market has significantlyundervalued the Company.
At the current valuation, we compute a TEV / LTM EBITDA multiple of 4.0x. Takinginto account the recent earnings estimates, the TEV / Fiscal 2007(1) Revenue andEBITDA multiples are 0.4x and 5.3x, respectively. Furthermore, the current MVE /tangible book value multiple is 1.3x. We view these multiples as significantlydepressed for a profitable business model with strong cash generation and stronggrowth prospects.
Finish Line's closest comparable company is Foot Locker, Inc. ("Foot Locker"), acompany that has been rumored to be a target of takeover or going privatetransaction. At a stock price of $24.00, Foot Locker's TEV / LTM EBITDA multipleis 6.7x and its TEV / Fiscal 2007(2) Revenue and EBITDA multiples are 0.6x and6.5x, respectively. Furthermore, the current MVE / tangible book value multipleis 2.2x. The rumored takeout price range is $26.00 to $32.00, and represents arange that we have justified by developing and evaluating our own leveragedbuyout model for Foot Locker. At the midpoint of the rumored takeout pricerange, the TEV / LTM EBITDA multiple is 8.1x and the TEV / Fiscal 2007 EBITDAmultiple is 7.9x.
Based on these trading multiples, the implied per share values for FINL are asfollows:
o 6.7x TEV / LTM EBITDA: $17.64
o 0.6x TEV / Fiscal 2007 Revenue: $17.55
o 6.5x TEV / Fiscal 2007 EBITDA: $13.43
o 2.2x MVE / tangible BV: $19.24Based on the possible takeout price multiples, the implied per share values forFINL are as follows:
8.1x TEV / LTM EBITDA: $21.04
o 7.9x TEV / Fiscal 2007 EBITDA: $16.02
We believe that Finish Line represents an as good, if not better, leveragedbuyout and/or management buyout candidate than Foot Locker given the Company'srelatively lower valuation, strong cash flow generation, potential for a marginrecovery story and diversified growth prospects. Over the last several yearsprior to calendar 2006, Finish Line experienced stronger revenue and earningsgrowth than Foot Locker. We also believe that the Finish Line shoppingexperience is truly a superior one given the stores' fresh decor, improvingproduct mix and wide selection of non-footwear goods.
In addition, Finish Line is undervalued compared to recent precedenttransactions in the specialty retail space. PETCO Animal Supplies, Inc. (PETC)announced a buyout by a sponsor group and management at a TEV / FY 2006 EBITDAmultiple of 7.9x. There are many examples of specialty retailers such as TheSports Authority, Inc. and Michaels Stores, Inc. that have been acquired since the beginning of the year for TEV /EBITDA multiples between 7.5x to 11.0x.
AMEND CORPORATE GOVERNANCE STRUCTURES
We believe that Finish Line's stock price has been negatively affected by thedual class voting structure (Class A/Class B) for the Company's common shares.Messrs. Cohen, Klapper and Sablosky control approximately 56% of the votingshares, yet only approximately 11% of the economic interest. Given that theClass B Common shares held by Messrs. Cohen, Klapper and Sablosky are freelyconvertible into Class A shares, we urge these shareholders to exercise theirconversion right as a good faith indication to the other Class A shareholdersthat we are all aligned in the pursuit of shareholder value.
In addition, other structural considerations of the Company's corporategovernance symbolize entrenchment and should be remedied by the board. As anexample, the board should immediately repeal the voting requirements for Article9 of the Restated Articles of Incorporation - Provisions for CertainCombinations.
COMMENCE DUTCH TENDER OFFER
We note that the Company has purchased approximately 1.1 million Class A sharesin the thirteen weeks ended August 26, 2006, and that the Company has 2.6million shares still available under the share repurchase program instituted bythe board in July 2004.
We urge the board to use the Company's strong balance sheet to commence a Dutchtender offer. We note that there is significant amount of availability under theCompany's $75 million revolving credit facility, but we think the most efficientcapital structure would be to replace the credit facility with a comparablysized revolver in addition to a term loan B of at least $100 million. A termloan B facility would minimize annual amortization requirements and offerflexibility with regards to pre-payment to allow the Company to execute itsgrowth strategy unfettered. Considering the modest pro forma total debt / EBITDAand adjusted debt / EBITDAR multiples and comparable issuers' ratings, webelieve that Company should get attractive pricing on both tranches of thefacility. We suggest the use of proceeds be a Dutch tender offer at a modestpremium to the current share price. We believe this course of action iscertainly accretive to continuing shareholders while still prudent from acapital structure standpoint.
We reference the recent announcement of Brinker International, Inc. (EAT) torepurchase 14% of their outstanding shares in conjunction with a debt financingat modest leverage levels and the market's subsequent positive response to thisinitiative as a exemplary model for a transaction.
CONSIDER ESTABLISHING A SPECIAL COMMITTEE AND RETAIN AN INVESTMENT BANK TOASSESS STRATEGIC ALTERNATIVES
To the extent the stock price continues to languish, we urge you to establish aspecial committee of independent directors to assess, with the help of areputable investment banking firm, certain initiatives to enhance shareholdervalue. We believe that any review should include a going private transaction inconjunction with management's reinvestment or pursuing an outright sale of thebusiness.
We see the PETCO transaction history and management's partnership with financialsponsors as a model for a Finish Line transaction. There are significant meritsto operating Finish Line as a private company given the recent operatingperformance of the Company, and a going-private transaction at a valuation at asignificant premium to Finish Line's current stock price would deliver value toshareholders. As a private Company, management may make operating and strategicdecisions based on the long-term goals of the Company while minimizing the needto service quarter-to-quarter expectations of public shareholders. Also, aconservatively levered capital structure would allow the Company to pursue thesame, or even more aggressive, growth plan with the Finish Line concept storesand Man Alive and Paiva if their returns merit.
Given the diversity of our fund strategies at Clinton Group Inc., and our beliefin the long-term prospects of the Company, we would welcome an opportunity toevaluate taking a minority role as an equity investor alongside management and afinancial sponsor partner or as a subordinated debt holder.
We believe these initial steps that we have constructively laid out in thisletter should serve to deliver long-term value to the Company's shareholders. Wenote that you stated to shareholders during the first quarter conference callthat YOU WOULD BE "VERY, VERY OPEN MINDED" IN CONSIDERATION OF THE "LONG-TERMBEST INTEREST OF ALL THE SHAREHOLDERS," so we look forward to continued dialoguewith you.
We enjoyed meeting with you and hope to continue and open and constructivedialogue. To that end, please feel free to contact Conrad Bringsjord, ManagingDirector, at 212-377-4224 or Joseph De Perio, Vice President, at 212-739-1833 atClinton to discuss any and all issues further at your convenience.
Portfolio Manager Event Driven and Activist Investments