Right Start to Acquire Zany Brainy
Right Start Inc., a Calabasas-based retailer of educational toys and developmental products for children under 4, said Thursday that it is acquiring Zany Brainy Inc., which sells similar merchandise for ages 4 through 12, in a cash and stock deal.
“It’s a perfect complement; it’s like sliding two pieces of the puzzle together,” said Jerry Welch, chief executive of Right Start.
Both chains cater to affluent parents with annual incomes of at least $60,000, Welch said.
Right Start is making the acquisition after receiving $20 million in financing from investment firm Waterton Management, which announced intentions to buy Zany Brainy after the King of Prussia, Pa.-based retailer filed for reorganization in Bankruptcy Court in May.
To buy Zany Brainy, Right Start said it is paying $11.7 million in cash, issuing 1.1 million shares of its stock and assuming $85 million in debt. Los Angeles-based Waterton will own a 48% stake in the combined companies.
Waterton, led by deal maker Ken Abdalla, had planned a collaborative effort with Right Start all along, Welch said.
“It just made sense to use the Right Start corporate structure to make the acquisition,” he said.
The two retailers also will merge at the store level. Some Zany Brainy stores will begin selling Right Start products this fall, Welch said. Right Start has targeted 130 out of 187 Zany Brainy locations in 34 states for such cross-marketing, Welch said.
“This is a pretty good combination,” said Bryant Riley, an analyst for B. Riley & Co. In addition to the marketing advantages, Right Start is acquiring a brand name that is strong in its own right, he said.
Zany Brainy, he said, filed for Chapter 11 bankruptcy protection after a string of setbacks largely unrelated to its reputation or the products it sells.
The retailer’s downward spiral started when it lost $20 million on its Internet venture and spent $20 million more than anticipated to integrate Noodle Kidoodle, a 60-store rival it acquired last year, Welch said. The final blow was a lousy fourth quarter for sales.
Riley called Waterton’s decision to back the deal “a huge plus” for Right Start, which has 68 retail stores nationwide.
“Waterton is a very savvy group of investors in retail stocks,” he said. And the firm’s involvement, he said, probably contributed to investors’ reaction Thursday. Right Start shares closed at $3.58, up $1.10 in Nasdaq trading.
Right Start valued Zany Brainy’s assets in cash, inventory and accounts receivable at $115 million.
The transaction, expected to close by Sept. 5, is subject to approval by Right Start investors and the Bankruptcy Court.
