By  on December 7, 2010

NEW YORK — J. Crew Group Inc. had suitors besides Texas Pacific Group and Leonard Green, but it was the belief that Millard “Mickey” Drexler would stay on in a deal with TPG that tipped the scales in its favor.

According to regulatory filings with the Securities and Exchange Commission released Monday, J. Crew said that its chairman and chief executive officer told the special committee evaluating the potential sale of the retailer that “if the company were to be sold, given that he is 66 years old, he had significant reservations about the prospect of working for a new boss, but that he had a high comfort level with TPG and had a positive experience with them during the period in which TPG owned the company.”

The committee concluded that Drexler would be “unwilling to work for any third party other than TPG.”

The private equity fund acquired J. Crew in 1997, brought Drexler onboard in 2003, took the firm public in 2006 and sold off the final remnants of its earlier stake last year. J. Crew agreed to be acquired and taken private by TPG and Leonard Green for about $3 billion on Nov. 22.

According to the SEC documents, there have been occasional overtures to J. Crew from entities interested in merging with the retailer, including one in the fourth quarter of 2008 from TPG, but none of those talks proceeded beyond the preliminary stage.

The deal was done in less than three months. TPG co-founder James Coulter, a director of J. Crew, again raised the possibility of buying the company on Sept. 1. Talks, including TPG’s tie-in with Leonard Green, proceeded into November.

During the talks, another entity, not identified in the filings, made an inquiry that failed to move beyond the preliminary stage, and another unnamed private equity firm expressed interest. However, the special committee didn’t pursue the private equity possibility based on its belief that Drexler would stay on only if TPG were involved.

Neither Coulter nor Drexler was involved in the retailer’s board decisions on the sale of the company, according to the SEC papers. Also recusing herself in those discussions was director Heather Reisman because of potential conflicts of interest: her husband is a founding partner of a private equity firm, of which she is a board member, that was also interested in a transaction for the sale of the chain.

Although not stipulated in the SEC filing, Reisman is the wife of Gerald Schwartz, founder and ceo of Onex Corp.

According to the acquisition agreement, Drexler owns 11.8 percent of J. Crew’s stock and would enter into a new employment agreement with the new owners. The filing said the initial term is for four years, subject to automatic extensions for successive one-year periods. His base salary will be $200,000, with the possibility of a bonus opportunity of $800,000, based on the achievement of certain performance metrics.

The filing said the initial offer was $41 a share, and through negotiations by the special committee, was increased to $43.50. Leonard Green was said to be unwilling to go as high as $45 a share.

According to the filing, and information from Perella Weinberg Partners, adviser to the special committee, the $43.50 per share offer, or $3 billion transaction price, puts the company’s enterprise value at 8.6 times its earnings before interest, taxes, depreciation and amortization for the trailing 12 months, versus a medium of 7.9 for specialty apparel firms and 8.9 for the branded retail category.

The offer also represented a 19.2 percent premium to the $36.49 closing price of the stock on Nov. 19; a 29.6 percent premium to a one-month average stock price of $33.57; a 29.2 percent premium to the three-month average stock price of $33.66, and an 8.7 premium to a 12-month average stock price of $40.01. Shares closed down 9 cents at $44.04 Monday versus a 52-week high of $50.96, reached on April 26, and a 52-week low of $32.03, reached on Aug. 16.

Following the completion of the deal, TPG would own 66.2 percent, Leonard Green 25 percent and Drexler and his related trusts 8.8 percent. The two funds are expected to contribute $1.1 billion to the purchase price. Barring the emergence of another suitor, the TPG-Leonard Green deal has a walk-away date of May 18, 2011. Different termination fees are triggered depending on which parties are still standing on certain dates.

In addition, Drexler will have 5.1 million in shares of vested stock options having a value of $151.5 million.

There are currently seven shareholder lawsuits, including one in Manhattan federal court.

As of Nov. 23, the retailer operates 250 retail stores including 221 J. Crew retail stores, 9 Crewcuts and 20 Madewell stores, the J. Crew catalogue business, jcrew.com, madewell.com and 85 factory outlet stores.

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