Harman drops nearly 25% as sponsors try to pull LBO; Genesco sues Finish Line to press closure

By Paul A. Harris

St. Louis, Sept. 21 - With stock prices advancing on the major exchanges Friday, special situations was dominated by news of skittish sponsors looking for exit signs.

Market sources advised Prospect News that these signs are clearly marked "MAC," which stands for "material adverse conditions."

The final session of the final week of summer 2007 saw the Dow Jones Industrial Average rise nearly 53½ points, or approximately 0.40%, to close at 13,820.19.

The Nasdaq was up nearly 17 points, or 0.64%, to close at 2,671.22.

Meanwhile the S&P 500 was up seven points, or 0.46%, to close at 1,525.75.

Harman sponsors walk

Throughout the session, special situations market sources were tracking the Harman International Industries, Inc. (NYSE:HAR) situation.

The Washington, D.C.-based electronics and audio equipment company's shares were under pressure from the open, according to a trader who cited a story which appeared Friday morning in the Wall Street Journal warning that sponsors Kohlberg Kravis Roberts & Co. LP and GS Capital Partners VI Fund, LP had lost their appetite for deal at the specified $120 per share price.

Mid-morning an analyst told Prospect News that the story amounted to "a crushing blow" to the company's share price which at that point was trading at just above $90.80, way down from Thursday's close at $112.25 per share.

The analyst suggested that the sponsors had to be wondering whether the company is worth the price tag in an environment where consumer spending, including spending on automobiles, is potentially declining.

"If you buy Harman you want auto sales to be in positive territory," said the analyst, explaining that Harman makes navigation systems for most of the BMW, Mercedes, Audi and Lexus product lines.

By Friday's close the Wall Street Journal story proved to be prescient indeed.

In a late-day press release, the company announced that the sponsors no longer intend to complete the acquisition, citing a material adverse change in Harman's business.

The sponsors assert that they are no longer on the hook to complete the deal because the adverse change breaches the merger agreement.

"Harman disagrees that a material adverse change has occurred or that it has breached the merger agreement," the press release stated.

Make mine a MAC

Earlier in the day a trader who was parsing the newspaper story suggested that sponsors looking to skate out of LBO deals based upon assertions regarding "material adverse conditions" clauses, or "MACs," were doing so on thin ice.

"Harman's last quarter wasn't so great," the trader said.

"But as with so many of these deals, when you read the material adverse conditions clauses, there is nothing which states that you can walk away from the deal without paying the termination fee.

"This is sort of a combination of what we have been hearing about First Data Corp. and Genesco, etc."

Harman's shares closed the Friday session at $88.76, having dropped $23.49, or 20.93%, on Friday.

Both the trader and the analyst asserted that the sponsors would have difficulty making a MAC case, and could easily end up paying a $225 million fee to terminate the deal.

The trader added that the sponsors must be aware that walking a way from a deal in this fashion is a decided hazard in the private equity business.

However the analyst asserted that at this point paying the $225 million termination fee might indeed make more sense than closing the deal.

Genesco sues Finish Line

Elsewhere on Friday, Genesco Inc. (NYSE:GCO) filed a lawsuit in Chancery Court in Nashville requesting a court order requiring Finish Line, Inc. to consummate its merger with Genesco.

The lawsuit also seeks to enforce Finish Line's rights against UBS under a commitment letter for deal financing.

"No more delays by the Finish Line and UBS; no more reservation of rights; no more bankers' putting their pencils down," Genesco chairman and chief executive officer Hal N. Pennington said in the release.

"We want a court of competent jurisdiction to enforce our rights under the merger agreement and for the Finish Line and UBS to live up to their obligations," Pennington said.

On Aug. 30, Finish Line said it was evaluating its options under the agreement after seeing disappointing second-quarter financial results from Genesco.

Genesco reported a loss before discontinued operations of $2.9 million, or $0.13 per diluted share, for the second quarter ended Aug. 4, according to a news release. For the same period last year, the company reported earnings before discontinued operations of $5.9 million, or $0.24 per diluted share.

Because of its merger agreement with Finish Line, Genesco said it was not issuing guidance on sales and earnings expectations for the remainder of the year.

On Sept. 17, Genesco shareholders approved the June 18 merger agreement, according to a press release. The deal would give them $54.50 in cash, without interest, for each share of Genesco common stock they own.

It was previously reported that the transaction is valued at about $1.5 billion, and the merger of the two specialty retailers was expected to be completed in the fall.

In a Sept. 11 letter to Finish Line, UBS Loan Finance LLC and UBS Securities LLC expressed concern about the "apparent deteriorating financial position" of Genesco Inc.

UBS had provided Finish Line with a commitment letter regarding financing of its proposed acquisition of Genesco, according to a company news release.

In the letter, UBS said its agreement to provide financing may be terminated if a "material adverse effect" has occurred with respect to Genesco.

Genesco said it has not experienced a material adverse effect. But UBS said it wanted Genesco to provide proof.

The lawsuit seeks to speed up completion of the merger, Pennington said. "Continued delay by the Finish Line and UBS is simply not acceptable."

A trader commented that the Genesco situation is but one more manifestation of a buyer getting cold feet, and attempting to run for cover behind a material adverse conditions clause.

"But there is nothing in these material adverse effects clauses that specifies that a bad quarter gives you permission to walk away from the deal," the trader added, referring to the second quarter of 2007 during which Genesco reported a net loss of $4.2 million, or $0.19 per share.

On Friday Genesco's share price closed at $47.60, up $0.85 or 1.82% on the day.

The buyout price is $54.50 per share.

Analyst favors Interstate reorg

Away from MAC-world, a special situations analyst was keeping an eye on the shares of bankrupt Interstate Bakeries Corp. (Pink Sheets: IBCIQ) on Friday.

The trader recounted that the company has filed a motion to extend exclusivity until January, contingent upon arriving at a settlement with its two principal labor unions, the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union and the International Brotherhood of Teamsters.

If the company fails to reach agreements with the unions it will essentially proceed to liquidate, the trader said.

"The stock cratered to around $0.40, but has since sort of held firm because people believe at these levels there is probably a pretty decent option value," the analyst said, adding there could be value in the stock whether the company gets a deal with the unions or not.

"I favor the reorganization scenario," the source added.

"I think there would be more value preserved for equity holders in that scenario, than there would be in the liquidation scenario."

The company's shares were unchanged Friday at $0.45.

Bausch & Lomb deal approved

Elsewhere Friday Bausch & Lomb, Inc. shareholders authorized the proposed merger with Warburg Pincus, LLC affiliates at a special meeting on Friday.

Holders of more than two thirds of Bausch & Lomb shares opted to approve the merger, which is set to close early in the fourth quarter.

Under the agreement, Bausch & Lomb shareholders will receive $65.00 per share in cash.

As previously reported, Advanced Medical Optics, Inc. withdrew its $75.00 per share offer after it was unable to reach an agreement on providing evidence of shareholder support to Bausch & Lomb. Advanced Medical Optics is a Santa Ana, Calif.-based provider of ophthalmic surgical devices and eye care products.

Bausch & Lomb shares (NYSE:BOL) closed Friday at $63.78, up $0.15, or 0.24%, on the day.

Topps-blockers

Elsewhere Friday a trader remarked that the Topps Co., Inc. merger deal remains murky, especially in light of an apparent shareholder dissent emanating from Crescendo Partners II, LP, Series Y and Crescendo Partners III, LP.

The source recalled that on Sept. 19 Topps held a special meeting asking stockholders to approve the merger between Topps and entities owned by Michael D. Eisner and Madison Dearborn Partners, LLC.

In an ensuing press release Topps said that before taking the vote Cede & Co. demanded an appraisal of 2,684,700 shares of Topps stock owned by Crescendo (approximately 6.9% of the total number of outstanding shares).

The same day Crescendo put out a press release stating "its extreme displeasure with the tactics employed by the executive committee of the Topps board in order to just barely obtain the vote required to approve the proposed $9.75 merger, including (i) postponing the special meeting twice for no reason other than that Topps lacked the number of votes required to approve the deal, (ii) disseminating materially misleading proxy materials to the company's shareholders, (iii) running a flawed sale process and (iv) excluding Arnaud Ajdler, Timothy Brog and John Jones from the process and preventing them from carrying out their respective duties as directors."

Crescendo proceeded, in the release, to express its "disappointment that Mr. Eisner and Madison Dearborn now stand to usurp the underlying intrinsic value of the company from its shareholders and reap the benefits of acquiring the company while it is at a potential bottom and in the middle of a restructuring process that was beginning to bear fruit."

On Friday the trader said that the company had yet to come out with the actual results of the shareholder vote, and added that shareholders might use their dissenter rights and potentially block the deal.

The trader added that such a move would require 15% of the shareholders, according to the merger agreement.

Topps shares (NASDAQ:TOPP) closed at $9.64, up three cents or 0.31%.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.