Destination Maternity Orchestra Prémaman S.A.

Destination Maternity is combining with Orchestra Prémaman S.A. in a stock-for-stock deal to form a $1.1 billion global maternity apparel and children’s wear firm.

Although the transaction is dubbed a merger, Destination Maternity is essentially selling itself to the French firm.

Under the terms of the agreement, Destination Maternity shareholders will receive 0.5150 of an Orchestra Prémaman S.A. ordinary share, in the form of American Depositary Shares, for each share of Destination common stock they own. The offer price of $7.05 a share is based on Orchestra’s closing stock price and the euro-U.S. dollar exchange ratio on Dec. 19, representing a 34 percent premium to Destination’s unaffected stock price of $5.26 on May 31, prior to Destination’s filing of an 8-K on June 1 on change-in-control compensation arrangements. Following the close of the transaction, Destination shareholders will own 28 percent of the combined firm, with Orchestra shareholders owning the 72 percent balance. The stock-for-stock deal is expected to be tax free to shareholders.

Following the closing, the combined firm will have an 11-person board. Pierre Mestre, Orchestra’s founder and chairman, will serve as chairman of the group. It will operate under the Orchestra name, with corporate headquarters in Montpellier, France. Destination will keep its headquarters in Moorestown, N.J., as well as its distribution facility in Florence, N.J.

The boards of both companies have approved of the cross-border merger, although there are still customary closing conditions including the approval of Destination and Orchestra shareholders.

This isn’t the first time Destination Maternity has tried to do a deal to expand its presence overseas. In 2014, the maternity apparel retailer had to make a statement under the U.K. Takeover code — due to speculation in the marketplace — that it was contemplating an acquisition of U.K.-based Mothercare plc. Destination Maternity declined to make an offer after it failed to get the support of its shareholders and the board of Mothercare.

Destination Maternity is the world’s largest designer and retailer of maternity apparel. Orchestra is a major player on the European front for apparel and footwear for children up to age 14, as well as child-care products. Its Prémaman Group also is the oldest maternity apparel brand in Europe.

Arnaud Ajdler, Destination Maternity’s chairman, described the planned merger as presenting “compelling value to our shareholders.” He said “shareholders of both companies are poised to benefit from a highly diversified product portfolio, improved financial strength and flexibility and greater distribution and sourcing capabilities.”

Mestre said, “The commonality in our target customers will drive incremental market penetration, marketing and cost efficiencies, and revenue growth. Orchestra and Destination will achieve greater growth and earnings together than they each could stand-alone.”

In a conference call to shareholders, Destination president and chief executive officer Anthony M. Romano said the transaction is expected to close in mid-2017, and the deal is “expected to be accretive to margins and EPS when full-year run-rate synergies are realized.” Mestre added that the deal brings “together two distribution channels, each with capacity to support growth without significant additional financial investments.”

There are significant operational and financial benefits expected to arise from the merger. The combined company will allow for enhanced offerings in apparel and in its product portfolio. That portfolio is also expected to help grow the lifetime value of Destination’s customer base — from months to years — as mothers have more options for infant products and children’s apparel purchases.

Through the leveraging of Orchestra’s direct sourcing network, the combined firm is expected to benefit from annual cost savings of $15 million to $20 million. Further, Destination’s more than 1,000 stores — primarily under the name plates Motherhood Maternity, A Pea in the Pod and Destination Maternity — and 703 leased department store locations are expected to provide Orchestra with an entry point for its children’s products into the U.S. market.

Orchestra’s 560-plus stores across Europe, Asia and Africa will provide an opportunity to expand Destination’s offerings overseas. Finally, the combined firm is projected to garner top line growth, a strong balance sheet and significant cash flow from diversified revenue streams.

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