The Deal: Frederick's of Hollywood to Be Taken Private

HOLLYWOOD (The Deal) -- More than 19 months after hitting the auction block and managing to steer clear of another bankruptcy, Frederick's of Hollywood Group (FOHL) has agreed to be taken private in a deal that values the once-flourishing lingerie company at almost $11 million.

A consortium, comprised of New York hedge fund Harbinger Group (HRG) subsidiary HGI Funding LCC and other common and preferred shareholders, has agreed to acquire the outstanding shares not already owned by the group for 27 cents a share, Frederick's revealed on Thursday.

The agreement represents a 50% premium over Frederick's closing price of 18 cents on Sept. 27, the day before the consortium made its initial 23 cents per share offer.

The group, which together holds 88.6% of Frederick's common stock, will essentially be paying just $1.2 million for the approximately 4.5 million shares it doesn't currently own. The agreement values Frederick's at about $10.6 million.

Frederick's, based in Hollywood, Calif., had already effectively handed control of the company over to Harbinger Group earlier this year, when an affiliate of HGI Funding, Five Island Asset Management, acquired its Series B convertible preferred stock for $10 million.

Frederick's, which was formed in 1947 by the creator of the pushup bra, Frederick Mellinger, put itself on the block on May 7, 2012, when it hired Allen & Co. as financial adviser to evaluate its options after receiving a number of inquiries related to various transactions.

Less than two years earlier, Frederick's had initiated a strategic review for its wholesale unit Movie Star, which was ultimately sold to Dolce Vita Intimates on Oct. 28, 2010, for an unknown price.

The outlook for Frederick's still wasn't looking very optimistic about two months ago, when, on Oct. 25, Mayer Hoffman McCann PC expressed substantial doubt about the company's ability to continue as a going concern.

The accounting firm pointed to the once-bankrupt company's recurring losses and negative cash flows from continuing operations, as well as its working capital and a shareholders' deficiency.

As of Oct. 26, Frederick's had cash and cash equivalents of just $250,000, while total debt amounted to about $24.9 million. The company has posted losses during 13 of the past 14 quarters, most recently reporting a $7.28 million loss for the first quarter ended Oct. 26.


Still, Frederick's shareholders seemed to be enthused by the intimate apparel retailer's latest attempt to turn the company around, which has failed over the past several years to keep up with others in the space including its mainstream rival Victoria's Secret, which operates as part of L Brands, formerly known as Limited Brands.

Shares, trading on the over-the-counter market under the symbol FOHL, advanced about 30.7% midday on Thursday to 26 cents, from 20 cents the previous day. Shares have climbed about 44.4% since the day prior to the consortium's initial offer on Sept. 27.

Thursday's agreement, which requires shareholder approval representative of at least two-thirds of the company's outstanding stock, calls for Frederick CEO Thomas Lynch to continue serving as chief executive for three years following the merger.

Though Frederick's appears to have escaped bankruptcy for now, that wasn't the case 13 years ago. Frederick's declared Chapter 11 on July 3, 2000, and on Jan. 7, 2003, the reorganized company emerged from bankruptcy controlled by a secured lender group headed by Credit Agricole Indosuez. At the time, it had $65 million in assets and $70 million in debt.

It wasn't until Jan. 29, 2008, that Frederick's began trading as a public company on the New York Stock Exchange as it completed a reverse-stock merger with Movie Star and FOH Holdings, its parent company at the time. Frederick's was eventually delisted by the NYSE because of non-compliance with stockholders' equity requirements.

Still, the lingerie company remains far from the value it once was, with a market capitalization of just $7.9 million as of Dec. 18. On Sept. 15, 2009, the company was worth about $64.93 million, representing its highest value over the last five years.

Miami-based Cassel Salpeter & Co. LLC's James Cassel is providing financial advice to Frederick's on the transaction, while Paul Lucido and Eric Schwartz of New York-based Graubard Miller are serving as legal advisers.

HGI Funding retained Milbank, Tweed, Hadley & McCloy LLP as legal adviser.

Frederick's officials couldn't be reached on Thursday. Harbinger Group declined to comment.


By Sarah Pringle


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