SF mid-market firms try on Payless in $2bn deal

San Francisco private equity firms Golden Gate Capital and Blum Capital will take private troubled shoe retailer Payless ShoeSource as part of a deal for Collective Brands.

Golden Gate Capital and an investor group including Blum Capital will acquire Collective Brands, owner of Payless ShoeSource, in a deal valued at around $2 billion including the assumption of debt.

The firms will pay $21.75 per share for Collective Brands, nearly a 5 percent premium over the company’s closing price as of 30 April. Golden Gate and Blum will acquire equal stakes in Payless ShoeSource and Collective Licensing, according to a market source. The two businesses will exist as a standalone entity following completion of the deal, which is expected to close in late Q3 or early Q4 2012.

NYSE-listed footwear company Wolverine Worldwide will acquire Collective Brands’ remaining assets in the deal for around $1.23 billion, according to a separate statement.

Payless: Golden Gate and Blum try the retailer on for size

In the joint statement, Golden Gate classified Payless as a turnaround investment. The popular shoe retailer has struggled in recent years – operating nearly 400 fewer stores than it was in 2007, according to its 2011 annual report. However, net sales have increased steadily since 2009, reaching nearly $3.5 billion during fiscal year 2011.

“We look forward to having Payless join our portfolio of great retail brands, and to supporting the leadership team as they continue the successful turnaround that is already underway,” Golden Gate managing director Josh Olshansky said in the statement. 

Golden Gate made the investment through its Series 2 Opportunity Fund, which closed on $3.5 billion last year after only 60 days on the market. The vehicle is unusually structured, as it allows the firm to replenish its pool of committed capital through different rounds of marketing every four years, a market source said. 

The firm was founded in 2000 by David Dominik and Jesse Rogers, formerly of Bain & Company. Golden Gate controls around $12 billion in committed capital under management, according to its website. 

Fellow mid-market firm Blum Capital was founded in 1975 by Richard Blum, the husband of California senator Dianne Feinstein. In 1994, Blum also set up Newbridge Capital alongside TPG to invest in emerging markets; the affiliate was eventually subsumed by TPG's Asian arm.