By and  on August 25, 2008

BHY S&B Holdings LLC, a newly formed affiliate of investment firm Bay Harbour Management and York Capital Management, received Manhattan bankruptcy court approval to purchase Steve & Barry’s late Friday afternoon.

The $163 million joint bid is expected to be completed today.

“The sale has been remarkably consensual,” said Judge Allan Gropper. “This sale needed to come on very short order. I realize that this is not a happy occasion for most of the people in this room. It does seem that this is the best outcome for this debtor at this time in this economy.”

The parties had been in court Thursday night, but the proposed sale was held up when Gropper voiced his dissatisfaction over a provision in the sale agreement that would have paid unsecured creditors about 2 cents on the dollar and prohibited lawsuits against the retailer’s co-founders, Steve Shore and Barry Prevor. Shore and Prevor together have a more than 20 percent ownership of BHY S&B Holdings under the sale agreement.

On Friday, it was disclosed in court that the sale of the retailer would go through, but the matter concerning Shore and Prevor’s immunity from creditors’ lawsuits would be the subject of a separate hearing in two weeks.

The consortium has not yet made any decisions concerning which Steve & Barry’s stores will close or when, but an announcement is anticipated this week. At Thursday’s court hearing, testimony was given that the new owners would keep at least 107 leases, although the target was to keep 150 stores open.

“I only want to operate stores that are profitable,” said Douglas Teitelbaum, managing principal at Bay Harbour. “One of those issues is the rent. If a landlord wants Steve & Barry’s as a tenant, it has to be at a price at which I can be profitable. Otherwise, they can have their space back.”

Teitelbaum also said the problem with the current Steve & Barry’s business model is that the retailer had a “big footprint of stores at the wrong price leasewise.” He also doesn’t seem bound by current price points. Steve & Barry’s built its reputation on offering fashion lines at extremely low prices and thus, low margins.

“It depends on the product. We haven’t made any final decisions.…It doesn’t make much sense to sell a Sarah Jessica Parker T-shirt and a Sarah Jessica Parker coat both at $9. The company sells shoes, I don’t know if they all have to be $9. There’s still some room for value there,” he said.

Stevan Buxbaum, executive vice president of Buxbaum Group, said landlords at “B” and “C” level malls couldn’t afford to lose a tenant taking 30,000 to 40,000 square feet because there aren’t many potential tenants out there requiring that kind of space. “If the landlords lower the rent, and the retailer raises some price points to get better margins, then there is a possibility that Steve & Barry’s can survive,” he said.

The approval of the sale Friday marked the end of a week of court appearances and late-night wrangling between the various parties.

It also marked what is a significant fall for the retailer, which just months ago was considered a rising star, snatching up real estate and gaining market share with low prices and high-profile brands including Bitten by Sarah Jessica Parker, Dear by Amanda Bynes and Eleven by Venus Williams.

Founded in 1985 by Shore and Prevor, the firm filed for Chapter 11 protection in July after it defaulted on a $197 million asset-backed loan from GE Commercial Finance Corporate Lending and was unable to secure $30 million in needed financing.

“High costs of materials and fuel prices have increased our cost of goods and cost of operating,” said Shore and Prevor in a statement released shortly after the filing. “At the same time, our customers are not in a position to pay higher prices, impacting our operating margins. Our customers are feeling the pain of high food and gas prices and declining home values, and many of them are being forced to shop closer to their homes and cut back on discretionary purchases.”

While the overall macroeconomic environment no doubt played a part in the firm’s downfall, many in the industry have speculated the company cut its margins too thin in an effort to keep prices down in what is an increasingly competitive market.

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