Combing for Cash : Salon Chain Regis Seeks to Expand by Acquiring Ailing Supercuts; Deal Valued at $120 Million

Regis Corp., seeking to exploit the fragmented hairstyling industry by acquiring other chains, said Monday that it has agreed to buy ailing Supercuts Inc. in a stock swap valued at $120 million.

Regis already operates several groups of shopping-mall-based salons, and its proposed buyout of Supercuts--a pioneer of the discount haircut chain--fits its strategy of grabbing a bigger share of a market dominated by mom-and-pop outlets.

San Francisco-based Supercuts has grown rapidly in the last two decades, as its appointment-free, $8 to $10 cuts captured the attention of value-conscious consumers. But its rapid expansion in recent years caused problems, including financial losses and executive turnover, that left it willing to accept Regis’ offer.

Even so, the nature of the hair-cutting market--where estimates put the number of outlets at roughly 130,000--point to more such deals in the months ahead.

Because the salon market is so fragmented, it’s ripe for consolidation at the hands of companies such as Regis, which are on the lookout for smaller, struggling firms that they can use to quickly expand, industry executives and analysts said. It’s a scenario that’s already occurred in such industries as video games and used cars.

In fact, the approximately 1,150-store Supercuts is only the latest in a string of takeover targets chased by Regis. The company, which runs such chains as MasterCuts and Regis Hairstylists, agreed earlier this year to buy 154 salons that operate within Wal-Mart stores in 27 states.

Regis believes it can alleviate Supercuts’ troubles and prolong its expansion. Supercuts would continue to operate under that name.

Paul Finkelstein, Regis’ chief executive, said in a telephone interview that “Supercuts was not on the [auction] block; we pursued them. Merging Supercuts into Regis gives us a terrific avenue of growth.”

The Supercuts deal, which is subject to approval by both companies’ shareholders, would give Regis “tremendous critical mass, as well as real estate in strip malls, which they hadn’t yet attacked,” said Barry Rothberg, an analyst with the investment firm Furman Selz in New York. “It gives them an underutilized chain that they can bring a lot of efficiencies to.”

However, Regis’ stockholders initially reacted coolly to the prospect of having their equity diluted by the deal. If it is completed, the merger would give existing Supercuts investors a 19.5% stake in Regis.

Regis’ stock tumbled $6.64 a share, or 20%, to $26.36 on Nasdaq, meaning the buyout proposal is valued at $10.54 per Supercuts share. Before the announcement, the deal was valued at $13.20 per Supercuts share, or $150 million.

Supercuts’ stock rose $1 a share to $9.75 on Nasdaq.

Supercuts opened its first store in Albany, Calif., in 1975 and began franchising outlets four years later. In 1987, it was acquired by an investor group led by David Lipson, and it took the company public in 1991.

Not unlike its fast-food counterpart, McDonald’s, Supercuts’ low-cost, assembly-line haircuts encountered their share of jokes.

Comedian Jay Leno, taking note in 1994 that Iraq cut the ears off army deserters, said that showed “the difference in our cultures. In America, you lose an ear, you’re a Supercuts customer.”

But there was no joking about Supercuts’ popularity, particularly in the value-minded 1990s. Its revenue tripled from $32 million in 1991 to $100.8 million in 1995, and its systemwide sales--including those of its franchisees--climbed from $190 million to $295 million in that period.

At one point, Supercuts’ shares were touted by renowned stock picker Peter Lynch.

But behind the growth, Supercuts was having problems. The company expanded too quickly, especially in the East, and it “severely taxed all our resources,” as Supercuts President Steve Price said in announcing the company’s $7.1-million loss for 1995.

“They expanded in New York aggressively and that proved to be a tough market for them,” Rothberg said.

Also, several managers quit or were fired, and early this year, the company forced out Lipson from his posts as chairman and chief executive.

Then in March, Lipson sued Supercuts for more than $3 million he said was still owed him, as well as for other damages. Supercuts said it would fight the complaint.

Finkelstein said the case is pending and that if the merger is completed, Regis will stand ready for any liability.

Times wire services contributed to this report.

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A New Cut

Supercuts Inc., founded in California 21 years ago, agreed to be acquired by Minneapolis-based Regis Corp. in a stock swap valued at $120 million. Although the discount hair salon’s sales have more than tripled in the last five years, its earnings have remained fairly flat until last year, when they dropped sharply. A look at sales, earnings, store expansion and employees at the company since 1991:

SALES

1995: $100.82

*

EARNINGS (LOSS)

Millions:

1995: -$7.08

*

NUMBER OF STORES

(Company-owned and franchise)

1995: 1,163

*

EMPLOYEES

In thousands:

1995: 5.0

Sources: Bloomberg Business News, company reports. Researched by JENIFER OLDHAM / Los Angeles Times