One leader of the misses’ retail market has a new majority owner and a lot less debt.

This story first appeared in the December 9, 2009 issue of WWD. Subscribe Today.

Shares of The Talbots Inc. rose more than 14 percent Tuesday after the specialty retailer reached a deal to end its 21-year relationship with its majority owner, the U.S. subsidiary of Japanese retail giant Aeon, retiring the $491 million debt it owes Aeon through a merger with special purpose acquisition company BPW Acquisition Corp., and agreeing to a new $200 million credit facility from GE Capital.

Upon completion of the multifaceted transaction, BPW is expected to own 60 to 69 percent of Talbots’ outstanding shares.

While analysts weren’t surprised Talbots would make a dramatic move to extract itself from its onerous liquidity problems, many were surprised the retailer managed a third-quarter profit, also announced Tuesday.

The Hingham, Mass.-based firm said it would merge with BPW Acquisition and use at least $300 million of BPW’s trust, combined with $200 million from the new GE facility, to repay in cash its $491 million debt to Aeon and Japanese banks. Talbots will retire all 29.9 million shares, or 54 percent of the firm, held by Aeon.

The deal, which is expected to close by the end of the first quarter of next year, calls for Talbots to issue between 38 million and 56 million shares to BPW shareholders in accordance with a floating exchange ratio based on the retailer’s trading price prior to closing.

“We had an extraordinary relationship with Aeon,” Trudy F. Sullivan, president and chief executive officer of Talbots, told WWD Tuesday afternoon. “Without their support, we couldn’t accomplish what we have accomplished. It’s been a very thoughtful process.”

Sullivan will continue to lead the management team, and Aeon directors, including former chairman Tsutomu Kajita, will resign from the board. Although more details will be made public in a proxy filing, expected within a week, three new members will join the board, according to Talbots.

While BPW will help choose the independent directors, chief operating officer and chief financial officer Michael Scarpa stressed this was a financially oriented acquisition and that BPW would not have day-to-day involvement in Talbots.

The transaction, which should allow Talbots to reduce its debt by about $330 million, “puts the company in a great position from a balance sheet perspective,” he said.

BPW shareholders will receive between 0.9 and 1.3235 Talbots shares per BPW share. The transaction also stipulates that 50 percent of BPW public warrants will be exchanged for Talbots shares at a ratio equivalent to 10 BPW warrants per 1 BPW share, with the remaining 50 percent to be exchanged for 16 million to 23 million new Talbots warrants. BPW sponsors and directors must forfeit 1.86 million shares of BPW common stock and will exchange their BPW warrants for BPW stock at a 10 to 1 ratio.

BPW was formed as a blank check company in October 2007 and completed its initial public offering in March 2008. It would have ceased operations had it not effected a business combination by Feb. 26. Officers include Gary Barancik, ceo; Michael Martin, chairman, and Joseph Perella, vice chairman and director.

The former worldwide head of Morgan Stanley’s investment banking division, Perella is chairman and founding partner of Perella Weinberg Partners Group and was co-founder of the legendary Wasserstein Perella & Co. investment bank. Barancik, also a Morgan Stanley veteran, has been a partner at Perella Weinberg for three years. Martin is a managing director at Warburg Pincus, which, among other investments, joined with TPG to buy Neiman Marcus Inc. for $5.1 billion in 2005.

“We believe this transaction makes enormous sense for all parties involved,” said William S. Susman, president and chief operating officer of investment firm Financo Securities LLC, which advised BPW in the deal. “It’s really a win-win-win.”

Once completed, the deal will remove a debt cloud that’s been particularly dark since Talbots’ acquisition of J. Jill Group for $517 million in 2006. Since then, Aeon, which was known as Jusco when it acquired Talbots from General Mills in 1988 for $325 million, has provided the retailer with a $150 million secured revolving credit loan facility, which supplemented a $200 million facility, used to pay off debt associated with the J. Jill acquisition.

During the second quarter of the year, Talbots sold J. Jill to Jill Acquisition LLC, an affiliate of Golden Gate Capital, and, as part of a turnaround strategy that’s incorporated merchandising as well as financial issues, entered into a buying agreement with Li & Fung Ltd., relaunched the company Web site, opened an upscale outlet and drastically cut inventories and expenses.

The fruits of Talbots’ labors began to show in the third quarter ended Oct. 31, when the firm posted a profit of $14.6 million, or 26 cents a diluted share, compared with a loss of $170.8 million, or $3.19 a share, much of it attributable to losses associated with J. Jill. Adjusting for certain items, Talbots profits tallied 31 cents a diluted share and were much better than the 14-cent loss Wall Street was expecting.

Sales, however, remain a challenge, dipping 13.5 percent to $308.9 million from $357.3 million, and declining even more — 15.9 percent — on a same-store basis.

“We continue to love Talbots as a turnaround story,” said Jennifer Black, analyst and president of Jennifer Black & Associates. “We have been saying that new merchandise looks much improved, with better styling without compromising the classic look of Talbots — and given recent performance, the customer clearly agrees.”

Black noted the company’s “disciplined” 21.1 percent decrease in selling, general and administrative costs, to $99.2 million, as well as its tight rein on inventory, which was down 27 percent from last year. While sales fell $48.4 million quarter-on-quarter, the reduction in the combined cost of sales, buying and occupancy plus SG&A came to $87 million.

Still, some analysts were concerned the retailer would not be able to improve on its paltry comp performance while inventories remained so lean.

“Comp is a metric, but it isn’t the only metric,” Sullivan said, placing greater emphasis on Talbots’ improvement in full-price selling and fewer markdowns.

For the nine months, the retailer’s net loss shrank to $33.5 million, or 62 cents a share, versus a loss of $192.1 million, or $3.62, in the 2008 period. Sales were off 21.2 percent to $919.7 million from $1.17 billion.

Talbots said it anticipates a fourth-quarter loss from continuing operations in the range of 6 cents to 14 cents a share, excluding charges and special items. Analysts are looking for a loss of 52 cents on revenue of $318.1 million.

Shares of Talbots closed Tuesday at $8.23, up $1.02, or 14.2 percent. They went as high as $9.05 in intraday trading.


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