NEW YORK – Sporting goods retailer Sports Authority Inc. (TSA) Monday said it agreed to be bought by an affiliate of private equity firm Leonard Green & Partners for around $1.3 billion, including debt.
The deal comes nearly three years after Sports Authority merged with Gart Sports and follows a recent effort to improve profits and boost its stock price.
Los Angeles-based Leonard Green previously owned Gart Sports and controlled it when Gart went public in 2002. Gart Sports merged with Sports Authority in February 2003.
"As a private company, Sports Authority will have greater flexibility to accomplish its long-term goals," company Chief Executive Officer Doug Morton said.
The buyout group includes members of Sports Authority's senior management team. Shares would be acquired for $37.25 each in cash, representing a 20 percent premium from its closing price on Friday.
Sports Authority shares soared $5.79, or 19 percent, to $36.84.
The company will conduct a market test for the next 20 days to ensure that the transaction is the best for the company's shareholders, Gordon Barker, chairman of the special committee of Sports Authority's board of directors, said in a statement.
The transaction is expected to close in the second quarter of 2006 and is subject to Sports Authority shareholder approval.
After its merger with Gart Sports, Sports Authority's shares rose sharply from the high-teens to more than $40 during the year. But early in 2004, the stock began a sharp slide, hitting just above $20 by October.
In January 2005, with its shares stuck in the mid-$20 range, Sports Authority cut its fourth-quarter earnings forecast.
But as the year unfolded, the company reported a string of profits and named a new president. Its shares hit a 52-week high on Monday after news of the buyout agreement.
Gary Balter of Credit Suisse. who has an "outperform" rating on Sports Authority, said: "The management team was doing an excellent job of turning around the margins at this large industry player." In a research note, he said: "The market's valuation at around six times cash flow we believe made this an attractive acquisition target. The questions now will be whether another buyer steps in."
The Leonard Green affiliate leading the buyout is Green Equity Investors IV LP.
Private equity firms buy companies, restructure the businesses, and seek to sell them later for a profit. They typically finance deals by paying one-third in equity and the rest in debt.
Balter said the Sports Authority buyout is good for rival sporting goods retailer Dick's Sporting Goods Inc. (DKS) because its largest competitor will now be leveraged with debt.
"This will also make for a more stable pricing environment to the benefit of Dick's margins, as a levered Sports Authority will most likely not be aggressive in the future," Balter said in the note.
Dick's shares were up $2.14, or 6.2 percent, to $36.75 on Monday.
Sports Authority's board of directors has unanimously approved the merger agreement and recommends that shareholders adopt the agreement, the company said.