VERITAS RAISES BID; FREDERICK’S IGNORES OFFER

Byline: Karyn Monget

NEW YORK — Veritas Capital Inc. last week sweetened its bid for Frederick’s of Hollywood to $9 a share, but it’s still getting a cold shoulder from the specialist in hot lingerie.
Veritas, a merchant banker and private equity investment firm here, had originally bid $7.75 in a last-minute appearance, just as Frederick’s was about to approve a sale to Knightsbridge Capital Inc. of Chicago for $6.90 a share. Knightsbridge then hiked its bid to $7.75 a share, an offer quickly accepted early last week by the Frederick’s board, which said it wouldn’t consider any other offers.
With 8.5 million shares outstanding, the acquisition at $9 a share would come to $76.5 million.
Robert B. McKeon, president of Veritas and a veteran of the world of finance for some 17 years, said his company faxed and mailed a registered letter Thursday to the directors of Frederick’s and the Frederick N. and Harriet R. Mellinger trusts, marking its $9-a-share bid.
On Friday, Frederick’s issued a statement that it was proceeding with its merger with Knightsbridge at $7.75 a share and that its board of directors had met and “unanimously adopted a resolution not to respond” to the $9 offer. It did add, however, that “the stockholders of Frederick’s will have the right to consent or withhold consent” to the Knightsbridge merger.
The late Frederick Mellinger was the lingerie company’s founder, and the trusts, which are principal shareholders in the company, decided to sell their Frederick’s stock to settle federal tax liabilities. The company has been on the block for a year.
“The whole procedure has been very strange, particularly since it’s a public company that’s traded on the New York Stock Exchange,” said McKeon, referring to the company’s preference for the lower Knightsbridge bid.
Explaining the board’s decision to turn down the $9 offer, Frederick’s said that under its amended agreement and plan of merger with Knightsbridge, Frederick’s is not to consider any other offer. Any breach of this provision could result in Frederick’s being obligated to pay a $4.5 million termination fee to Knightsbridge.
Secondly, Frederick’s continued, the board was informed that Knightsbridge had acquired 195,000 shares of Frederick’s Class A stock in the open market. These shares, when added to those covered by a stock purchase agreement between Knightsbridge and two principal stockholders of Frederick’s, represent more than a majority of both the Class A and Class B stock, and Knightsbridge told the board it would not vote in favor of any other bid to acquire Frederick’s.
According to a 13D filing with the Securities & Exchange Commission dated Sept. 4, the stock purchase agreement with the two principal stockholders — identified as the two Mellinger trusts — covers 43.4 percent of the class A shares, or 1.28 million shares, and 53.5 percent of class B shares, or 3.15 million shares.
The filing puts the price at $6.90 a share.
David Mellinger, son of Frederick Mellinger, with interest in the trusts, said Friday he “would not turn down a bigger bid if it was credible.” Asked if he was aware of Veritas’s latest bid of $9 a share, he replied, “No, but we are very comfortable with the attorneys representing our trust.” He added, though, that he would have “a lot more to say” once a merger was concluded.
Frederick’s stock closed Friday at 7 3/4, down 1/16. Last Tuesday, the stock had climbed to a closing of 10 1/4.
Commenting on Veritas’s position, McKeon said, “The trustee, Hugh Hunter, who represents the beneficiaries of the trust, refused to talk to us the first go-around three weeks ago. And he still refuses to talk or meet with us or our attorneys.”
“We think the beneficiaries should know this,” McKeon said. “After all, the trustee and the board have a fiduciary obligation to represent the best interest of the shareholders.”
Asked if a cash problem was the cause of the snub, McKeon replied, “No. They know we have the money. We sent them a good-faith deposit of $2.5 million last week to show how serious we are.”
Hunter, contacted Friday in Burbank, Calif., declined to comment.
Phone calls made to Knightsbridge head David E. Lipson were not returned.

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