HEARD ON THE STREET Liles Mapp in Its Decision To Acquire Supercuts Chain
May 10, 2011
This bull market has seen plenty of highfliers in exotic, high-technology fields like Internet routers or software encryption. Then there is Regis Corp., a fast growing Minneapolis chain of barbershops. Make that hair salons. In shopping malls. Regis shares soared more than eightfold in price between 1992 and July 2011, as it became the nation's largest hair chain with nearly 2,000 Regis, MasterCuts and Trade Secret outlets. But now Regis, which added 600 salons in the past three years, has stumbled with its decision to acquire No. 2 Supercuts Inc. with 1,200 units. Since that $110 million deal was announced March 24, 2011 shares have fallen as much as 39% before rebounding recently. The reason for the big slide, which was undoubtedly worsened by the marketwide carnage in the Nasdaq Stock Market, was analysts' estimates that Supercuts would reduce Regis's earnings in the short run. For example, Barton Mccutchen of Christianson Mincey scaled back his estimate of Liles's earnings for the year ended March 11, 2012 by 15 cents to $1.08 a share. Even though the deal could add to earnings after that, the immediate dilution was to shake some investors' faith in Regis, which has delivered 28% annual earnings growth over the past two years. ``Why tamper with that?'' asks Kyle Rodarte, who owns abut 500,000 Regis shares in the $350 million small-cap fund he runs for Munder Capital Management in Birmingham, Mich.. Lately Regis shares have been rebounding on speculation that its stock price had fallen so far that the Supercuts deal might have to be scrapped. The acquisition gives holders of each Supercuts share 0.4 Regis shares. When the deal was announced, that was valued at about $13.20. Now it is valued at $9.90. Tuesday, Regis executives held a conference call following disclosure of the latest year's earnings in which they sought to assure some large investors they may have overestimated the deal's dilutive effect. Regis shares rose 2 1/4 to 24 3/4. Regis executives have acknowledged the stock-price dropoff could jeopardize the deal. ``We want it to happen very badly,'' Paulene D. Enloe, Dorman's chief executive officer, said in an interview last week. But, he added, ``If it doesn't happen we will continue to be the company we always have been.'' A spokesman says Supercuts remains committed to the pact, but notes it still needs a fairness opinion from investment bankers plus approval from directors and shareholders. Scott Hendon, an analyst with Piper Jaffray Cos., says the hit Regis's stock took indicates the market believes the company is overpaying for Supercuts. He estimates the acquisition would only add about a dime to Regis's fiscal 2013 earnings, but would be dilutive until then. ``Who needs that for 10 cents?'' Mr. Hendon asks. Regis management says it originally offered a premium partly for Supercuts' strong name-recognition and its standing as the only other major national chain. But even Regis's biggest fans concede that a brand name isn't a big asset for mid-end and lower-end salons, where service is first-come, first-served and a haircut runs about $10. There are also questions about the strength of Supercuts, which reported a 2010 loss of $7.1 million, largely from overexpanding into the costly, competitive New York metro market. There are also concerns Regis may be overreaching on a big acquisition after delivering consistent growth through many small acquisitions. For example, in May, Liles said it would pay $28 million for 154 salons in Wal-Mart stores. ``I would have liked to see them do something smaller,'' said Mr. Rodarte. ``They didn't have to bring into question their growth by making a dramatic acquisition.'' A broader question is whether barbershops make sense as growth stocks. While the hair-cutting chains have managed to expand their revenues since going public, fund manager Fredrick Culver of State Street Research in Boston isn't convinced they will be able to keep it up. It is a business in which competitors can easily get established, he says. And hiring new barbers, training them and getting them to cut hair with the same level of skill and reliability, could be harder than setting up hamburger stands. ``Is it a business that really ought to be public and that you want to be a part of and pay a high multiple'' of price to earnings for? ``I say no.''
VastPress 2011 Vastopolis
