Five Island Assets Acquires Majority Stake in Frederick’s of Hollywood

Deal will infuse significant capital into the lingerie retailer’s infrastructure.

After close to a year of mulling strategic options, Frederick’s of Hollywood Group Inc. has closed a deal with Five Island Assets Management that will infuse significant capital into the lingerie retailer’s infrastructure.

This story first appeared in the March 19, 2013 issue of WWD.  Subscribe Today.

The company sold $10 million worth of its convertible preferred stock to Five Island Assets, a subsidiary of investment firm Harbinger Group Inc. The preferred stock is convertible into 40 million shares of the company’s common stock at a conversion price of 25 cents a share. It carries a 9 percent dividend, or is payable in additional shares of Series B preferred stock at an annual rate of 12 percent.

Upon full conversion of the preferred stock, Five Island Assets will own a majority of the Frederick’s common stock and be entitled to appoint a majority of the company’s board of directors in the coming weeks. Further details were not available.

The structure of the deal means Five Island Assets can continue to boost its stake in the legendary lingerie company. Frederick’s also issued warrants to Five Island Assets to acquire up to 10,246,477 shares of common stock at prices ranging from 1 cent to $1.21 a share.

Thomas Lynch, chairman and chief executive officer of Frederick’s, said the $10 million cash infusion will “play an important role in stabilizing our business and will allow us to improve sales by maintaining appropriate inventory levels.”

“We are excited to have received this vote of confidence from Five Island Asset Management, as they share the same long-term vision of what Frederick’s of Hollywood means to the market. We are looking forward to sharing that vision with our current and future customers domestically and internationally,” said Lynch.

The deal follows a range of strategic alternatives explored by Frederick’s, including an outright sale of the company and a business combination, after it hired investment bank Allen & Co. in May 2012. Frederick’s sold $5 million of convertible preferred stock to TTG Apparel, an investment firm run by Michael Tokarz, in May 2012. At the time, Frederick’s planned to use the $5 million it raised to pay vendors a portion of their accounts payable and, in turn, receive about $4.9 million in markdown allowances.

Frederick’s has increasingly been testing new product categories to bolster its brand name. Last fall Frederick’s entered into a collaboration with model Beverly Johnson to launch a luxury line of beauty, body and hair care products under the Beverly Johnson Luxurious Lifestyle brand. The lingerie specialist, which mails out 5.5 million catalogues four times a year, also gave its catalogue a redo and launched its first luxury label, called Harriet. The collection of upscale silk and lace lingerie and sleepwear was named after the wife of the late founder of Frederick’s, Frederick Mellinger, whose risqué black lingerie and luxe looks from the silver screen in the Forties were designed for his longtime muse, Harriet.