NEW YORK — Limited Brands has agreed to sell Lerner New York to an investor group led by the chain’s president and chief executive officer Richard P. Crystal and Bear Stearns Merchant Banking for a total of $153.5 million in cash and notes.

This story first appeared in the November 25, 2002 issue of WWD. Subscribe Today.

For months there has been speculation that the $940 million, 522-unit Lerner division would be sold to enable Limited to focus on its core Victoria’s Secret, Express and Bath & Body Works brands.

Lerner, purchased in 1985 by Limited, has earned only small profits as it has continually searched for sharper merchandise direction and a brand identity. According to Wall Street estimates, last year Lerner’s operating income was $25 million. For 2002, it’s estimated to rise to about $45 million.

Lerner caters to women ages 25 to 45 seeking value or budget prices and features merchandise under the New York & Co label. “I don’t think there are many specialty retailers in this space,” observed Bo Arlander, senior managing director of Bear Stearns Merchant Banking. She added that so far, 127 stores have been converted to the New York & Co. nameplate for a more updated image, and the majority of the remainder is expected to follow.

Although the chain has somewhat of a differentiated specialty niche in malls, the consensus last week was that Limited was lucky to pull off the deal that it did, receiving $78.5 million cash and a $75 million subordinated note. It also received warrants for 15 percent of the common equity of the new company, so if Lerner’s ever went public, Limited stands to gain. The transaction is expected to close within several weeks.

“Today’s announcement represents a continuation of our strategy to sharpen Limited Brands’ focus and create shareholder value,” Leslie H. Wexner, chairman and chief executive officer, said in a statement.

Limited started narrowing its portfolio in 1995 in order to focus on its biggest divisions with the most potential. It has sold Lane Bryant to Charming Shoppes; a majority interest in Galyan’s to that store’s management, and Freeman Spogli & Co. Galyan’s subsequently went public. Other restructuring steps include repurchasing more than 300 million shares of stock and closing more than 1,000 stores. Remaining divisions that could be sold off if Limited found takers are Henri Bendel and Limited Stores. Neither have seen profits in years, though Limited Stores is said to be close. Limited also operates White Barn Candle Co.

“The Lerner brand no longer fit into the Limited,” said Jennifer Black, executive vice president and senior research analyst, Wells Fargo Securities. “It’s aimed at a more moderate customer and the fashion concept couldn’t be developed into what Limited considers a 360-degree brand, or a master brand. It’s more of a budget brand.”

She said Lerner primarily competed with Kohl’s, Sears and J.C. Penney, and to some degree, Chico’s, which is generally more expensive. “With coupons, at Chico’s you can get a whole outfit for $100, but Chico’s has a definite identity,” Black said.

Bear Stearns Merchant Banking is the private equity arm of Bear, Stearns & Co. Inc. It invests in leveraged buyouts, recapitalizations and growth capital opportunities. The firm manages a $2 billion equity capital pool, has invested in 27 companies in different industries, including apparel and specialty retail. It recently completed the initial public offering of Aeropostale Inc., which it acquired from Federated Department Stores in 1998.

Arlander acknowledged that Lerner suffered from a lack of capital and enough attractive locations to improve its performance, and added, “This transaction positions the company for a bright future as an independent specialty apparel retailer focused on offering affordable fashion under its proprietary brand.”

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