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Finish Line Should Prevail In Buyout Trial

Posted: Dec 13, 2007 10:31 AM by Glenn Curtis

Tickers in this Article: FINL, FL, GCO

It was supposed to be a positive thing, the combination of two well-known footwear retailers. The corporate bigwigs and the analyst community had already started counting the potential synergies, but now Finish Line's (Nasdaq:FINL) planned acquisition of Genesco (NYSE:GCO) has instead turned into a nightmare for both companies.

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Now a judge will decide if Finish Line will be forced to complete its $1.5 billion buyout of Genesco. In this article I'll examine how the marriage went bad and why I think Finish Line has a good chance of winning in court.

History Of A Failed Marriage
Finish Line is a large operation, selling shoes in almost 700 stores in 47 states. In June of this year, management decided "large" wasn't nearly large enough, and Finish Line bid $1.5 billion for Genesco, a footwear retailer with about 2,000 locations in North America.

The expectation was that the combination could lead to some serious cost savings down the line. Almost anytime you combine two companies of that size, there's sure to be some overlap. It was assumed the two businesses could compliment each other and give the combined entity a decent leg up on other competitors such as Foot Locker (NYSE:FL).

The risk came from the fact Finish Line was gobbling up a bigger fish in terms of both store base and revenue. But it seemed few people thought that would be a real obstacle. Both sides were confident they could get a deal done.

The trouble started in summer, not long after Genesco reported much lower-than-expected second quarter results. From that point on, it appeared Finish Line might be finished with Genesco, or at the very least that it would negotiate a lower price. There were also concerns on the Street that even if Finish Line wanted to go through with the deal that financing might not be available given the deterioration in Genesco's earnings.

Like virtually every dispute in America these days, this one is headed to court. On September 21, Genesco filed suit to force Finish Line to go ahead with the deal. (For added insight, check out M&A Competition Is Cutthroat For Acquirers and The Wacky World Of M&A's.)

Why Finish Line has the Upper Hand
This is America. Anything can happen in a court room. However, I suspect that Finish Line will be likely be "vindicated" and not be forced to consummate the transaction. There are several reasons why:

1) I view Genesco's financial performance in the second quarter as a major adverse event. And therefore I believe the court will allow Finish Line to pull out.

2) I think that combining the two companies would be a mistake at this point. After all, Finish Line and Genesco are both struggling.

3) Even if a judge were to enforce the transaction, I suspect that more legal battles would be required to force UBS AG (NYSE:UBS) to finance it. Without the money, it probably isn't going to happen anyway.

It's hard to predict when all the legal wrangling will conclude. It seems to be in Genesco's interest to keep fighting. Its very survival appears threatened due to shareholder suits. In addition, I sense Genesco is viewed as damaged goods, and therefore I'd be surprised if Foot Locker or another player stepped up and bought it at this point.

At the end of the day, I think there's a good chance that Finish Line will prevail and I also think that if it does, its stock could pop. In fact, I think it could potentially double from current levels. As far as Genesco is concerned, I think it will survive. However, I certainly would be reluctant to be a Genesco shareholder these days.

Bottom Line
Finish Line and Genesco are squaring off in court over whether Finish Line has an obligation to complete a previously announced acquisition. I believe Finish Line will prevail and its stock will trade higher as a result. However, the justice system is hard to predict and, therefore, there are no guarantees.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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