SNEWS® has learned from inside sources that Wolverine World Wide, parent company of Merrell footwear and apparel and licensee for Patagonia footwear, has entered into an accelerated due-diligence process to acquire Chaco. Though no date for the deal closing has been set as yet, indications are both parties are seeking to ink the acquisition prior to Outdoor Retailer Winter Market.
Company officials at both Wolverine and Chaco declined on-the-record comment when contacted by SNEWS. However, insiders as well as numerous retailers interviewed by Wolverine during the due diligence process (in excess of 100, we have learned) have confirmed to SNEWS that the acquisition is pending.
SNEWS® View: SNEWS has been on a Chaco watch since mid-2008, following delivery hiccups on the heels of a transition of some Headwaters sandal manufacturing to China. While Chaco had been producing footwear in China for some time, the company had hoped to transition all of its manufacturing by July 2008. Unfortunately, the combination of a Chinese New Year with a major snowstorm in southern China last year meant the factory only delivered 15 percent, rather than the hoped-for 25 percent of the total production. As a result, Chaco had to ramp up a bit more in Paonia, Colo., to make up the 10-percent delivery shortfall. Other issues too likely affected the company, including some upper management changes. Mark Paigen took full control of the company again in early 2008, leading one to surmise that perhaps, operationally, things were getting a bit bumpy at the once smooth-running company. Add to that menu a serving of a collapsing economy and a bank that was not willing to increase a credit line as needed and Chaco suddenly found itself in the unenviable position of having to decide between a number of reorganization options -- the most appealing of which was seeking a buyer for the brand.
And this is a harbinger that indicates that the nature of any deal in the outdoor industry is changing. While we have enjoyed nearly a decade of seeing big companies paying ridiculous multiples for well-capitalized and successful businesses, the future is not so rosy. We expect we will see other brands such as Chaco -- traditionally successful and wonderful brands with great product and leadership -- after a tough six to eight months of economic downturn, finding themselves without cash and no way to generate it themselves. While in another economic climate this situation would likely be survivable, in this market -- when the cash flow goes south and the credit market is non-cooperative -- finding a buyer willing to step in at a much lower-than-hoped-for multiple will be standard fare. Either that or filing Chapter 11 -- or worse, Chapter 7 liquidation.
In this case, Merrell is, we believe, a perfect partner for Chaco. We would expect Mark Paigen to stay on, at least for a year. Chaco without Paigen is like Cheerios without milk -- kind of dry and certainly not as tasty. Once the deal closes, SNEWS will, of course, bring you the full details.