By  on July 8, 2008

NEW YORK — With deadlines closing in and no new financing in sight, the options are narrowing for Steve & Barry's University Sportswear.

Credit and liquidation sources say that, unless a white knight can be found, liquidation is a distinct possibility for the once red-hot chain specializing in trendy sportswear at big-box prices and could be acted upon this week. A full liquidation package, consisting of the locations of the stores, their square footage and related data, was expected to go out to prospective bidders at various liquidation and asset redeployment firms last week.

Similarly, a bid package on the stores to be shuttered — initially expected to include about 100 of its approximately 270 stores — was expected in mid-June, but was delayed as the troubled firm pursued $30 million in needed financing and considered the option of bankruptcy reorganization.

But reorganization has been complicated by changes in the federal bankruptcy code dating back to 2005. Debtors now have no more than 18 months to file a reorganization plan and 210 days to decide which leases to keep, forcing many to decide immediately which units to keep in operation.

Steve & Barry's reportedly reached out to different retailers, but nothing came of those overtures before the Fourth of July holiday. However, sources said that the Port Washington, N.Y.-based chain was in discussions with a retailer over the weekend regarding a possible acquisition. It could not be learned definitively what terms were being discussed, or how a deal would be structured, but the name Sears Holdings Corp. was mentioned as a possible suitor.

Steve & Barry's, some suggested, could be positioned as a brand within Sears' Kmart stores, possibly in tandem with some of its licensed merchandise, such as the Bitten label brought to it by Sarah Jessica Parker and the Starbury label championed by the NBA's Stephon Marbury. The possible relationship could parallel the one that Lands' End has in Sears stores.

Spokespeople for Steve & Barry's and Sears declined comment Monday.

But many in the financial community were skeptical about such a deal. According to a credit analyst, Steve & Barry's wouldn't fit the Sears profile the way Restoration Hardware, which Sears was rumored to have been interested in at one time, might have. There's also a question of whether Sears would even want any of the existing Steve & Barry's locations. The boxes are about 50,000 to 100,000 square feet, much smaller than either a typical Sears or Kmart big box.And Sears' cash position isn't as strong as it had been. At the end of the first quarter, Sears Holdings, including Sears Canada, had about $1.4 billion in cash, down from $3.5 billion for the same period a year ago. In the past year, the retailer has spent $2 billion in stock repurchases and paying down some debt, a credit source said.

The same source speculated that Sears perhaps could be willing to part with $500 million in cash on an acquisition, but not much more if it wanted to be fiscally prudent.

But how much would a distressed Steve & Barry's be worth? The retailer reportedly generates about $1 billion in annual sales and isn't likely to command a one-time sales multiple due to its rocky financial position. Sources aren't even sure if the retail flameout could get a transaction done at $500 million. However, one source said that, factoring in the value of inventory and locations, the company's total value could be "several hundred million."

Assessing the retailer's value is tricky because the privately held chain has been fairly close-mouthed about its operations, other than its store expansion plans. And sources aren't certain whether the company is trying to sell locations, trademarks or a combination.

Most of its better known fashion labels — Bitten, Dear by Amanda Bynes and Eleven by Venus Williams, as well as a group of TV-related brands from CBS Consumer Products — are believed to be licensed to it, rather than wholly owned. The status of these labels in a sale or liquidation is uncertain.

Steve & Barry's, some speculated, may have gotten into its current cash crunch based on its obligations to licensors as well as landlords.

In addition to rapid expansion — it had just 60 stores in 2004 — and its bloated portfolio of licensed brands, the retailer has had to struggle with thin margins as it's kept its retail prices below $20. This helped appeal to celebrities including Parker and Marbury, but made profitable operations difficult.

While there had previously been talk of closing up to 100 Steve & Barry's sites, one real estate source said, "I don't know how the market would absorb all these [empty] stores," referring to recent retail bankruptcies and liquidations. Those bankrupt operations include Linens-N-Things, Goody's Family Clothing Inc., Friedman's Inc., Crescent Jewelers, Whitehall Jewelers and the now-defunct Sharper Image.In a move intended to help it grow and position itself for a possible initial public offering, the retailer in November sold a minority stake to TA Associates, a Boston-based buyout and private equity firm, for undisclosed terms. At the time, Barry Prevor, co-founder and co-chief executive officer, said the firm had "found over 5,000 locations in the U.S. that could potentially support a Steve & Barry's."

The company in March sealed a $197 million asset-based loan from GE Commercial Finance Corporate Lending for "ongoing capital needs." Because the GE financing had been arranged so recently, many market sources were surprised when they heard how pressured Steve & Barry's was to get additional financing. GE declined to comment.

However, the credit markets are still reeling from the subprime debacle from August, and the timing of its blip on the radar couldn't be worse for Steve & Barry's.

George South, a partner in the financial restructuring group at the King & Spaulding law firm, said, "Right now, obtaining financing is particularly difficult. There seems to be a lot of money out there, but not necessarily for distressed situations. The investors [who look at distressed firms] are cautious right now, particularly with retailers such as this one."

South pointed out that because recent loans were provided with few covenants, or financial restrictions, many times when a company defaults it is because it is in severe distress. Before, when there were greater restrictions on borrowing, lenders often saw problems sooner and sometimes were able to get a company to act before things got worse financially.

"At this point [with covenant-lite agreements], often the company's operations are so bad when [the distressed news] comes out that no lender would be willing to take a chance on lending more money," South said.

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