Deere Continues LESCO Purchase Despite Key Shareholder Reluctance

Deere’s proposed acquisition of LESCO last week represents the largest from a revenue position in the 170-year-old history of the equipment manufacturer. It also represents, perhaps, Deere’s most important undertaking in its ongoing efforts to become a business partner to professional golf course superintendents and lawn and landscape contractors nationwide.

Because the Deere/LESCO transaction won’t be finalized for 60 to 90 days, top management at both companies said they could not reveal specific plans for the future of both companies. It is clear LESCO and its 332 service centers and 125 stores-on-wheels will be folded under the John Deere Landscapes umbrella.

JDL has 300 locations across the United States and management at Deere indicated the site overlap is not significant. JDL is a distributor of irrigation, nursery stock, outdoor lighting and landscape supplies primarily to the installation and new construction markets. In contrast, LESCO mainly serves the maintenance side of the green business as a distributor of pesticides, fertilizers, seed and other soft goods. Deere views the purchase of LESCO as an opportunity to strengthen customer relationships in an effort to additionally maintain the properties their customers may only currently install.

As Deere works to integrate LESCO into its JDL locations and fulfill its vision of becoming a true solutions provider to its customers, a LESCO shareholder has filed an appeal against the sale citing the price per share undervalues the intrinsic value of LESCO. The definitive merger agreement calls for the purchase of LESCO for $14.50 per common share in cash.
 
Hawkshaw Capital Management LLC currently owns more than 1.2 million shares of LESCO common stock, which is said to represent 13.6 percent of shares outstanding.
 
“LESCO’s intrinsic value is significantly higher than what Deere & Co. is offering,” says Frank Byrd, managing member of Hawkshaw. “The proposed price of $14.50 at best captures the cost synergies available to Deere & Co. as a strategic acquirer, but fails to adequately compensate LESCO shareholders for a return to normal operating earnings and the value creation from continued expansion of the company’s high return on capital retail service center business.”
 
The most recent 52-week period showed LESCO stock ranging from 6.70 to 18.17. It traded at $10 a share early last week and today lists at $14.40 per share.
 
Throughout last year, LESCO was in the process of rejuvenating its standing in the golf industry following a decision by previous management to eliminate field sales staff to reduce costs. The move backfired, costing LESCO sales in a business in which relationships play a key role.
 
Hawkshaw said the sale couldn’t have come at a worse time – immediately following one of the worst operating years in the company’s history. Between lost sales, raw materials costs and restructuring, the company posted a $20 million year-end operating loss.

The issues that precipitated the stock’s decline are temporary and largely fixable during the next two years, Byrd says.
 
Jeff Rutherford, chief executive officer of LESCO, could not comment on the sale or the shareholder complaint, but says the company will publish it’s proxy in about a week.  
 
As the sale continues through shareholder and regulatory approval, Deere executives say it will work with distributors on both sides to determine to best way to deliver products and services to its customers.
 
“For our customers, this represents the joining of two great brands, innovation and quality built on strong customer service,” said Gregg Breningmeyer, director of sales and marketing for John Deere Golf & Turf One Source.

“The positive reaction we’ve heard from our customers and associates affirms why (this deal) makes sense. It’s more resources for our customers and an expanded portfolio of goods and services than in the past.”

Breningmeyer says no decisions have been made about future branding of the combined company; however, he said LESCO’s stores-on-wheels remain in its plans.

One Source is a work in progress, he adds. “We don’t want to be all things to all people. We want to find out what appeals to our customers and take advantage of what they want.”
 
While there are redundancies between LESCO’s Cleveland, Ohio, corporate headquarters and John Deere Landscapes headquarters in Alpharetta, Ga., Breningmeyer says it’s too soon to say whether or not the office will remain open.