Silo decides its future is better with Fretter - Fretter Inc. acquires Silo Inc. chain of consumer electronics stores

Discount Store News, Oct 4, 1993 by Pete Hisey

LIVONIA, Mich. -- Fretter, the 101-store consumer electronics chain based here, has agreed to acquire rival Silo to form the nation's third largest CE chain, with roughly $1.4 billion in annual revenues. The bulk of those sales come from Silo, which reported sales of $970 million in 1992.

The merged chain (final approval is expected by November) will operate roughly 280 stores, which overtakes Circuit City for the most in the industry--but most of those stores are small by industry standards (12,000 sq. ft. to 15,000 sq. ft.). Fretter plans to change the operate name of the combined company to Young Electronics Store! (YES!), but a spokesman said that initial planning has Fretter operating the stores under their various existing names: Fretter, Silo, YES!, Fred Schmid and Dash Concepts.

Although the combined company's buying power will probably be greater than was the case for either of its components, YES! will most likely have little impact on full-line discounters. The stores will have the same names be in the same places with the same product selection, and will evern have mostof the same employees, so in all probability the consumer won't even notice the change.

The acquisition, which will essentially trade Fretter stock ($45 million in preferred stock and a 30% stake in Fretter, with options to purchase up to 49% of the combined company) to Silo parent Dixons plc, is Fretter's second in as many years. Two years ago, the chain acquired Denver-kbased Fred Schmid, an 18-store chain that served the Rocky Mountain market. With the Silo acquisition, Fretter has become a national concern, operating in 22 states ranging from the Northeast of Los Angeles.

The catch is that Silo hasn't turned a profit in recent years. Its parent, Dix ons, the largest CE dealer in the United Kingdom, merged the two chains' results, but eventually conceded significant losses for the past three years. The chain recently exited several mar kets, mostly in the South, and reported a '92 loss of $35 million. It has been on the block for at least two years, with no takers.

Although it virtually gave the chain away, the deal is a clear benefit to Dixons, which can lose a maximum of $50 million--about a year's average losses--on the downside, but stands to share 50/50 in any gains. Dixons' corporate finance director Robert Shrager was quoted as saying that "if all goes wrong, we have a downside limit of $50 million, but if it all goes well, can take advantage of converting our shares for a 49% stake in Fretter." Dixons' stock skyrocketed after the deal was announced.

Fretter probably had to make the move. With Circuit City and rival Best Buy powering into market after market (including Fretter's Michigan base) and expanding their national presence, small localized chains are increasingly surrendering market share. Highland Superstores, formerly Fretter's major competitor, was dissolved last year after being battered by the two national powers. A Fretter spokesman, controller Paul Mattei, said the company's strategy will be to apply its operational expertise to Silo. "Obviously, they've been losing money and there are going to be some changes," he said. "But we're excited about the acquisition."

Fretter president John Hurley said the Silo deal "creates a tremendous opportunity for our respective companies, their shareholders, employees, vendors and customers." It will "combine [the two companies'] respective strengths to create a powerhouse in the retail appliance and consumer electronics industry."

"The acquisition was extremely cost-effective," Mattei said, and one of the hidden benefits was Silo's national distribjution network. For now, purchasing and distribution will remain in the hands of the two companies' respective staffs, but some merging of those responsibilities is probable, Mattei said. He added that the two chains are a good fit because their store concepts are similar and product mixes nearly identical.

The obvious risk is that the chain has bought an operating interest in a financial black hole, as Ames, another modest, well-run business, did when it purchased cash-hemorhaging Zayre in 1989.

Despite a downturn in the fortunes of small regional operators, Fretter has been profitable recently, with an operating income of $8.7 million on 1992 sales of $362 million. However, the chain has not, until recently, faced significant competition from national chains, particularly Best Buy. Now, Best Buy, Circuit City and computer superstores CompUSA and Computer City are invading Fretter's core markets with new bigger stores.

In recent years, Silo has seen a near-total exodus of its top American management, including chairman Barry Feinberg, president Steve Westerfield, and vps Ron Fleisher and Phil Garrison. Dixons replaced them, with extremely limited success, with some of its top financial executives, including Peter Morris, president, and Ian Livingstone, cfo, both of whom will remain with Silo during a transition period, then watch over Dixons' interests on the combined company's board of directors.