Dick's to purchase Galyan's for reported $362 million

Dick's Sporting Goods Inc. (NYSE: DKS) announced this afternoon during a 5:15 p.m. EST conference call that the retailer had entered into an agreement with Galyan's Trading Company (Nasdaq: GLYN) to acquire all the issued and outstanding shares of stock of Galyan's. Pending shareholder approval, the deal is expected to close by October 2004.
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Dick's Sporting Goods Inc. (NYSE: DKS) announced this afternoon during a 5:15 p.m. EST conference call that the retailer had entered into an agreement with Galyan's Trading Company (Nasdaq: GLYN) to acquire all the issued and outstanding shares of stock of Galyan's. Pending shareholder approval, the deal is expected to close by October 2004.

The cash deal is valued at $362 million and will pay Galyan's shareholders $16.75 per share. The offer price is 50.9 percent greater than the price Galyan's stock was selling for at the close of trading today -- $11.10 up 16 cents. The total purchase price is based on approximately 18.2 million Galyan's shares and the assumption of $57 million in net debt.

Ed Stack, chairman and CEO of Dick's, stated during the conference call that no decision had been reached regarding store closings or the future of the Galyan's executive team; however, he did say that Dick's would quickly close the Galyan's headquarters in Indianapolis, and that he expected "some" of the management team to relocate to Dick's Pittsburg, Penn., headquarters. He also stated it was likely that a few Dick's and a few Galyan's stores would be closed if the company determined there was too much market saturation or if a store was under-performing.

Stack stressed to analysts and media listening to the conference call that this deal was more about real estate than acquiring a retail business.

"With the acquisition, we have an opportunity to enter markets that would take us years to open and expand in areas such as Chicago, Denver, Atlanta, Dallas and Minneapolis. Galyan's has premium real estate in those locations," said Stack.

Dick's will keep open the Indianapolis-based distribution center run by Galyan's since Stack said he believes it "serves the geographic footprint of our company very well." He added that the combination of its own distribution center and this one "ideally supports the logistical needs of our growing company."

The purchase of Galyan's brings to a close the three-month battle the two sporting goods retailers have been waging since Dick's moved onto Galyan's home turf in Indianapolis in March, with Dick's clearly gaining the upper hand. Acting increasingly desperate, Galyan's posted a $4.5 million loss in the first quarter, which ended May 1, significantly more than the $2.6 million loss recorded during the same period a year ago.

Galyan's operates 47 stores in 21 states -- mostly in the Midwest, South and East with outreach that had begun recently into Western states such as Colorado and Nevada -- and reported sales of $719 million over the last 12 months ending April 2004. Pittsburgh-based Dick's operates 169 stores in 27 states throughout the Eastern and Midwestern United States. Together, Dick's and Galyan's generated $2.2 billion in revenues in 2003. Once the acquisition is complete, and factoring in store openings already planned, Dick's will operate 239 stores in 33 states by the end of 2004, edging closer to the behemoth national sporting goods chain of about 385 stores in 45 states that had been created when The Sports Authority merged with Gart Sports in August 2003.

Speculation began even among analysts during the call as to how Dick's might be changing the product mix at Galyan's. Stack pointed out that since Galyan's had been modifying its product mix lately to become more like Dick's, the differences between the two retailers had narrowed considerably.

"Galyan's has already initiated a re-assortment effort to give more weight to sporting goods," said Stack.

While all Galyan's stores will be renamed with the Dick's brand by early 2005, he said, some Galyan's features will not disappear, like for example, climbing walls (and a few on the conference call snickered when one analyst commented that he now knew where any profits Dick's would be making might go).

About other segments that Galyan's carries but Dick's does not -- specifically snowsports since Galyan's carries skis and snowboards -- Stack declined to commit.

"We will study the snowsports business and make a decision based on what makes sense," said Stack.

On the fitness side of the fence, the impact will likely be felt less harshly than on the outdoor side, and the merging could on its surface provide additional business and outlets.

"At the end of the day, its good for us," said Bob Whip, president of Horizon Fitness. "We see this transition as a positive. We have a good relationship with the folks at Galyan's, but we've been fortunate that Dick's has given us good play too."

Whip points out that Dick's has been making more of an effort to pump up the specialty aspect of the company's full-line stores, such as adding fitness trainers to staff the fitness area: "Those guys are committed to making it work," he said.

Among fitness brands, Galyan's carries for example Body-Solid, Sole, Diamondback, Horizon and Keys, plus TKO, Harbinger, Polar, Schiek and Valeo, with a house brand done with the help of Spirit Fitness. Dick's carries Nautilus, Schwinn, Spri, Kettler, Sportcraft, Harbinger and Icon, plus Harbinger and Polar, among others.

In speculating about the future of outdoor, Stack made it very clear that outdoor retail was not Dick's focus when he stated, emphatically, that this deal was "not driven by the outdoor retail segment." In scanning the two websites, the difference in focus of brand differentiation at the outdoor specialty level is dramatic. Galyan's carries Nike ACG, Columbia, MSR, Hi-Tec, Marmot, Montrail, The North Face, Asolo, Lowa, Merrell, Mountain Hardwear, Salomon, Vasque, Camelbak, Kelty, Petzl, Black Diamond, Slumberjack, Arc'Teryx, Gregory, Jansport, Lowe Alpine, Eagle Creek and more. Dick's carries a far more focused, less broad, selection including Eureka, Kelty, MSR, The North Face, Sierra Designs, Camelbak, Timberland, Merrell, High Sierra, Columbia and more.

Frank Hugelmeyer, president of the Outdoor Industry Association, told SNEWS® that for the outdoor arena, "It's going to change the marketplace somewhat. There's a lot of business from the specialty (brands) at Galyan's and a little less so at Dick's. But the mixes have been getting closer, and this will accelerate that. Certainly there will be brands that will be impacted."

Adds Mike Egeck, president of the Outdoor Coalition for VF Corp., "If I am a smaller specialty retailer, this might be a good thing too. It could potentially open up niche markets for those who are specialized and really tuned into their local market. And, for national retailers, this presents an opportunity to compete well by differentiating yourself more."

SNEWS® View: While this move surprised a lot of folks we spoke with, it was also not totally unexpected either. Galyan's has built beautiful stores and offers a great shopping experience -- at least it used to prior to all the financial troubles raining down. Dick's is an extremely well-managed, well-oiled retail machine. There was not a lot of overlap in current distribution so from a business sense it appears to be a very intelligent and very strategic move for Dick's.

For the fitness market, vendors have to be mostly pleased. Suddenly, the pie for those playing with both Dick's and Galyan's became a whole lot bigger with a retail entity that pays its bills on time and knows how to market itself -- something Galyan's has been struggling with. We're told the move is a bit of a relief to some companies that were watching its Galyan's receivables with an eagle eye. The potential for exponential growth is then staggering. For companies like Nautilus and Schwinn, which are not at Galyan's, the move could be big, as it could also be for brands like Schiek and Diamondback now at Galyan's. But with brands having already arranged set territories with some specialty retailers -- especially since some of the brands carried by Galyan's are also more specialty oriented -- we're sure this is going to prompt meetings and hard discussions about the future. And Dick's may have the upper hand with its size and scope.

For the snowsports market, expect to see Dick's entering in a big way. It can't afford not to since its largest competitor -- the mega-retail conglomerate The Sports Authority (made up of TSA, Gart, Sportmart and Oshman's, all under one company banner) -- plays well on the snowsports side. We expect that snowsport vendors will be all too happy to add Dick's to the distribution platform, again happy that they can deal with a retailer that traditionally pays its bills on time -- seeing a trend here?

As for outdoor specialty vendors, the big boys will have to play ball with Dick's, but it is likely they will play willingly -- where else do they go? TNF is already selling to both Dick's and Galyan's, so the impact will be only good for that company, we suspect. Other smaller specialty vendors, though, might not be as lucky as Dick's works to fully integrate Galyan's into its model of being a sporting goods/team sports/fitness equipment retailer with a camping product mix. We'll be watching closely to see how Dick's handles the influx of large outdoor specialty vendor apparel lines, ordered last year by Galyan's and already in the production pipeline. Will we see price slashing from Dick's to move product quickly and generate cash from those vendors the retailer is less likely to continue a program with in 2005? Ah, the million-dollar question.

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