Canton, Mass. -- The buying spree continues at Tweeter Home Entertainment Group, which has signed a definitive merger agreement to acquire high-end A/V specialty chain Sound Advice for about $150 million in stock.
Under terms of the deal, 33-store Sound Advice, based in Dania Beach, Fla., would become a wholly owned subsidiary of the rapidly expanding Tweeter chain. Its chairman/CEO, Peter Beshouri, would stay on as president, and senior VP Michael Blumberg and chief operating officer Chris O'Neal would continue in their current roles. Beshouri would also be nominated to sit on Tweeter's board.
The announcement of the one-for-one stock swap, which is set to close September 1, comes days after Tweeter completed its eighth acquisition, of Charlotte, N.C.-based Audio Video Systems, and just weeks after buying San Diego, Calif.-based Big Screen City. The merger with Sound Advice, its largest to date, would up Tweeter's store count to 135 units nationwide.
The latest purchase, Tweeter's first of a publicly traded company, continues a pattern of pairings between the chain and fellow members of the Professional Retailers Organization (PRO Group). Unlike prior buyouts, however, which reduced the group's dealer ranks, Sound Advice would likely maintain its membership in the buying organization, Beshouri told TWICE, as does the chain's own subsidiary, Showcase Home Entertainment.
The merger agreement, which was unanimously approved by both companies' boards and awaits stockholder and regulatory approval, comes as little surprise. Tweeter had long held a 4.5 percent stake in Sound Advice, and upped its stock position to 8.5 percent in February. According to Tweeter president Jeff Stone, "Peter Beshouri and I have talked informally for years about the possibility of doing something together, but the timing was never right," given what Sound Advice believed was an overly rich valuation for Tweeter's stock. Noting the similarities between their businesses, and Sound Advice's strength in custom installation, he added "We hope to be able to learn some things from Sound Advice that will help us [further] improve Tweeter's performance."
Beshouri said his company had been open to an acquisition for the capital infusion it would bring, explaining that "We could not get the attention on Wall Street that we thought we deserved, and couldn't get a float." Finding a white knight assumed an added urgency after Best Buy's buyout of Magnolia Hi-Fi, he said, because "We didn't want to not be in the driver's seat."
According to Beshouri, both parties agreed that "it makes sense" to maintain Sound Advice's current executive team, which will free up Tweeter management to focus on its acquisition and store-building strategy. He added that Tweeter has no interest in changing the Sound Advice nameplate to reflect its new ownership, given its established franchise in Florida.
Sound Advice operates 24 Sound Advice stores, four Bang & Olufsen specialty stores and one Bang & Olufsen/Electronics Interiors concept store in Florida. It also owns the two-unit Showcase Home Entertainment in Arizona -- which it acquired as a laboratory to develop its custom installation skills -- and maintains a home theater showroom within a Sears Great Indoors store in Scottsdale, Ariz. At $200 million, the company's annual revenue is about half that of Tweeter's.
The merger is structured as a tax-free, share-for-share stock exchange. The $150 million valuation of the deal represents a forward cash flow multiple of 6.5, compared to Tweeter's typical acquisition multiple of 5 to 5.5 times cash flow. The stock exchange ratio would change if the average five-day market price of Tweeter shares rises above or falls below a range of $21 to $30 per share. Tweeter will also assume about $30 million in Sound Advice debt, and would receive a $4 million breakup fee if the merger agreement is terminated under certain circumstances.
Shares of Tweeter fell about 9.5 percent to $26 while Sound Advice shares rose 60 percent to $24 in the hours following the merger announcement.