Express Inc. (EXPR - Get Report) and private equity firm Sycamore Partners LLC have ended negotiations over a leveraged buyout of the retailer due to a lack of available financing with favorable terms, the two parties said Tuesday.
In response, investors sent the New York-based apparel retailer's stock tumbling about 16% in early morning trading to $12.14 per share.
As part of the termination agreement, Sycamore will not release any information regarding its efforts in contacting third parties for the purpose of acquiring Express until June 15.
While Express on Friday raised its guidance for the fourth quarter 2014, comparable sales were still expected to decline between 3% to 4% compared to a previous estimate that was in the high single digits. Net income was expected to range from $36.5 million to $39 million, or $0.43 to $0.46 per diluted share, as compared to previous guidance of $32 to $38 million, or $0.38 to $0.45 per diluted share, the company had said.
Comparable store sales data is seen as an indicator of a retailer's health.
Overall, apparel retail has turned intensely competitive in recent years, as consumers have shifted spending dollars away from apparel to other categories such as consumer electronics. The trend is also due to the expansion of new entrants over the past decade such as fast fashion retailers H&M and Zara and a gravitation of shoppers from traditional enclosed shopping malls to the internet.
Those factors among others have led to bankruptcy filings in recent weeks by apparel retailers such as dELiA*s Inc., Wet Seal Inc., Body Central Corp. and Deb Shops Inc.
Between poor comparable sales and decline within the segment overall, financing with favorable terms was likely difficult to arrange.
Sycamore first set its sights on Express early in June, revealing a 9.9% stake in the retailer and stating it wanted to proceed with due diligence to value the company for a buyout offer.
In response, Express said its board had appointed a special committee to determine "a course of action it believes is in the best interest of all stockholders." The retailer also passed a poison pill or a stockholder rights plan, causing significant dilution for anyone acquiring more than a 10% stake in Express.
The news of Sycamore's interest at the time sent shares of Express up more than 20% in after-hours trading to $16.55 per share, giving it a market cap of nearly $1.4 billion.
Although Sycamore is considered to be a PE firm, its strategy makes it more of a hybrid between a LBO firm and a strategic acquirer. Its investment in Mast Global Fashions, an apparel manufacturing sourcing business, is a way to help its other portfolio companies cut costs and improve margins. That sort of support ability has given it more flexibility when bargaining to buy apparel retailers.
In his letter to the Express board when Sycamore disclosed its stake, the PE firm's founder Stefan Kaluzny noted his familiarity with the company. He was at Golden Gate Capital when the firm bought Express from L Brands Inc. in 2007 for $778 million (the company was then known as Limited Brands Inc.) Golden Gate ended up taking Express public in 2010, raising $270 million in an initial public offering. (Sycamore also acquired Mast Global from L Brands.)
Sycamore Partners received legal advice from Winston & Strawn LLP and Gary Holihan of Gary M. Holihan PC.
Express received financial advice from Perella Weinberg Partners LP's Andrew Bednar, and legal advice from a Sullivan & Cromwell LLP team consisting of Francis Aquila, Melissa Sawyer, Jinhee Chung and Chenjing Shen.
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