Private equity firm Sun Capital Securities Group urged the board of Kellwood Co. on Thursday to immediately terminate the $1.6 billion apparel firm's debt tender offer. The board refused the request.
Kellwood on Wednesday issued a tender offer to buy back from bondholders as much as $60 million of 7.875 percent notes due next year. Holders who tender before 5 p.m. on Jan. 23 will receive the total consideration of $1,035 per $1,000 in principal of the notes tendered. Holders who tender after that, but by midnight of Feb. 6, will not receive the early tender premium and instead will get $1,005 for every $1,000 in principal. The move followed an $80 million stock repurchase last week.
Sun Capital is the second-largest Kellwood shareholder, with an ownership interest of about 9.9 percent. The firm has tried twice to acquire Kellwood, has been rebuffed both times, but shows no signs of giving up efforts to take over the vendor. The Boca Raton, Fla.-based private equity firm made its first $543.9 million, unsolicited buyout bid in October, and then repeated the offer a month later.
The letter, written by Sun Capital vice president Jason G. Bernzweig, described the tender offer as "ill-advised" and "value-destructive." The private equity firm said the bond tender, if completed, "would be destructive to equity value and would represent a direct transfer of value from your shareholders to bondholders."
Kellwood, as in previous exchanges with Sun Capital, dismissed the request. "The board believes that buying back stock and maintaining an appropriate capital structure delivers significant value to our shareholders," the company said in a regulatory filing with the Securities and Exchange Commission. "The board, the company and its independent advisers have carefully evaluated the best uses for its cash and Kellwood is confident that its plans will advance shareholder value."
Kellwood didn't address Sun Capital's point about the early premium tender. Instead, the St. Louis-based company reiterated its long-term financial plans: the $162 million sale of Smart Shirts to repurchase shares and reduce debt; the $80 million accelerated share repurchase agreement over the next nine months of about 18 percent of Kellwood's total outstanding stock at the current share price, and the cash tender offer. The company also said that its "revolving credit facility has sufficient capacity to fund the company's ongoing growth plans at a lower cost than the debt to be repurchased."Sun Capital said in its letter that "paying a premium to repurchase these notes at this time, when it would be clearly beneficial to hold the notes to maturity and repay them at par, is at odds with the fiduciary obligation of the board and management to maximize shareholder value."
Sun Capital reasoned that, if the board has genuine confidence in management's business plan, then the "right strategy for maximizing shareholder value would be to leave the notes outstanding at this time; distribute the cash proceeds to shareholders, either in a special dividend or via a share repurchase, and then refinance the notes in 18 months upon maturity at par."
The private equity firm added that, if the board has concerns about management's business plan, then the "right approach would be to negotiate with Sun Capital or run a sale process where potential buyers would have the ability to assume the notes. In either circumstance, the bond tender is not in the interest of Kellwood shareholders."
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