Emerisque Tapped as Hartmarx Stalking Horse

London-based private equity firm's "third and final" bid accepted.

Emerisque Brands UK Ltd., the London-based private equity firm, was named by bankrupt Hartmarx Corp. late last week as the stalking horse to acquire substantially all the troubled firm’s assets in a deal valued at $119 million.

This story first appeared in the May 26, 2009 issue of WWD.  Subscribe Today.

Hartmarx filed the papers in Chicago bankruptcy court late Thursday, but they weren’t available until Friday.

Emerisque said it expects to close on the transaction by early July, provided it is successful in its acquisition of the apparel firm. It added of Hartmarx, “We will continue to enhance the legacy of its iconic brands Hart Schaffner Marx and Hickey Freeman and develop its emerging lifestyle brands, such as Christopher Blue, Exclusively Misook and Monarchy to their fullest potential.”

Joining with Emerisque to acquire Hartmarx is SKNL North America BV, an Indian firm incorporated in The Netherlands that has retail connections in India. SKNL’s role in the joint bid is as a financial investor. The bid is for $85.5 million, or $70.5 million in cash and a junior subordinated secured note of not less than $15 million.

According to the purchase agreement signed by Hartmarx, Emerisque and SKNL, the cash component is subject to adjustment downward. If the adjustment is to less than $60.5 million, then the junior secured note is to be increased so the sum of the adjusted cash and note equals $75.5 million. The transaction also includes the assumption of $33.5 million in debt by the purchasers.

According to the agreement, the note is due in 2014, or a maturity date of five years from the date of closing, and includes a 3 percent pay-in-kind coupon. Holders of the note have first lien on three factories and one distribution center, and a second lien on Hartmarx’s intellectual property. Payment of the note is expected from the sale of the three factories and one distribution center, with the sale process to start within three months of closing. Repayment based on free cash flow is expected to be paid annually in years four and five.

Emerisque issued a statement Friday saying it is looking forward to June 1 “when we hope that the bankruptcy court will approve our nomination as stalking horse. We are very grateful for the support of Hartmarx Corp. and the company’s advisers. We look forward to working with Wachovia Capital Finance Corp., as agent for the company’s lenders, toward realizing our bid,” the company said.

Homi Patel, chairman and chief executive officer of Hartmarx, called the agreement a “very important step in resolving the future of Hartmarx as a continuing enterprise. In this challenging economic environment, at the present time, the Emerisque offer is the best and highest offer we have received and sets a baseline for a transaction to be completed consistent with our [debtor-in-possession] financing agreement.

“However,” he continued, “we will need continuing lender and other stakeholder support to meet the significant challenges of closing this or any alternative transaction.”

The support of Wachovia, now part of Wells Fargo Corp., has been a crucial stumbling block in efforts to restructure Hartmarx, and could prove problematic again as the various parties look to sew up a deal.

The bankrupt firm is seeking approval of bidding procedures for the required court auction to allow for the possibility of better offers. Hartmarx hopes to get approval of Emerisque as stalking horse on June 1. The deadline for new bids is June 25, with the auction scheduled for June 30 at the Chicago offices of Skadden, Arps, Slate, Meagher & Flom, Hartmarx’s bankruptcy counsel. If the deal doesn’t go through, Hartmarx would be responsible for paying Emerisque a $1.65 million break-up fee and reimbursing the London firm for $2 million in expenses.

Emerisque on Wednesday submitted what it termed its “third and final bid in a process which has been lengthy and expensive for all parties” and attached a Thursday expiration date to its offer.

Chicago-based Hartmarx filed for Chapter 11 bankruptcy protection Jan. 23 and, as one of the few remaining domestic producers of union-made tailored clothing, its fight to survive has increasingly been taken up by union officials and lawmakers. The choice of Emerisque should, for now, alleviate concerns about the firm’s future as a going concern with domestic production. The Emerisque bid retains the apparel firm’s brands, most of its factories and employees.

Wells Fargo/Wachovia, which financed the troubled clothier before and after its Chapter 11 filing, reportedly has leaned toward liquidation of the distressed firm. Recently, the bank noted it’s continued to finance Hartmarx, even though the clothing firm has been unable to pay the $114 million owed to the lenders led by Wells Fargo.

The bank is by no means obligated to support the stalking horse bidder. Some close to the sale process believe Wells Fargo might object to the choice of Emerisque and continue to eye a liquidation of the firm.

According to sources familiar with the bidding process, the bank has placed a higher valuation for certain assets than the bidders. If those valuations are accurate, there is a possibility liquidation would bring in greater value than the $119 million bid on the table. That supposedly is giving the bank impetus to push for a liquidation. However, those sources also said the way the bank arrived at its valuation numbers is based on outdated methods. They believe the valuations fail to take into account the current economic environment and inflate certain projections, including the availability of buyers in a market strung for cash.

The bank, a recipient of the government’s Troubled Assets Relief Program funds, has been the subject of intense political pressure, beginning with Rep. Phil Hare (D., Ill.), who worked in a Hart Schaffner Marx factory in the district he now represents, reaching up to include House Financial Services Committee Chairman Barney Frank (D., Mass.).

A spokeswoman for Wells Fargo declined comment.

Another question that could still affect Hartmarx’s fate is who might come in and bid at the auction. Spencer Hays’ IAC is said to be interested in men’s brands Hart Schaffner Marx and Hickey Freeman. So, too, is a Chicago-based investor group led by designer Joseph Abboud. It is unclear whether New York-based Mistral Equity Partners or Los Angeles-based Yucaipa Cos. would enter the fray again.