J. Crew Buyout ‘Threatened’ by Q3 Results

J.Crew CEO Millard “Mickey” DrexlerNew York—The $3 billion private equity buyout of J. Crew almost didn’t happen when the buyers threatened to abandon the deal because of the company’s poorer than expected third quarter results.

According to Securities & Exchange Commission (SEC) filings from the company, TPG Capital and Leonard Green & Partners had agreed a price of $45.50 per share when the companies were informed of J. Crew’s 14% drop in third quarter earnings. The two companies immediately threatened to walk away from the deal, leaving J.Crew to contemplate alternatives to the buyout, including a possible buyback of company stock.

Eventually, TPG Capital and Leonard Green countered with a $43 per share offer, before the two sides settled on a compromise figure of $43.50.

Two Other Offers Revealed

The newly released filings also reveal that two other, unnamed, companies had also expressed interest in J. Crew. Neither made an offer for the business, although one said it would do so if Millard “Mickey” Drexler, ceo, could be persuaded to back its bid.

Drexler’s role in the deal has garnered criticism since the filings release on Monday. Drexler, who owns about 11.8% of J. Crew’s common stock, held talks with private equity firms TPG and Leonard Green starting on August 23. The board was not notified of the discussions until between October 7 and October 11, according to the Monday filing.

Once the board was apprised of the discussions with TPG and formed a special committee on October 15 to evaluate a sale, Drexler told the committee that if the company were to be sold, he “had significant reservations about the prospect of working for a new boss, but that he had a high comfort level with TPG.” Thus the committee determined that Drexler, who is credited for J.Crew’s success in recent years, would be unwilling to work for any third party other than TPG.

 Drexler’s Role Scrutinized

Ronald Barusch, a mergers and acquisitions expert, told the Wall Street Journal, “There is no doubt in my mind that the background section of this proxy statement is going to be used for years to come as an example of things not to do in a management buyout.”

In his blog column in the Journal entitled “Why The J. Crew CEO Should Be Fired And The Company’s Sale Terminated” author Douglas A. McIntyre took Drexler to task over keeping the board in the dark about a potential sale and his possible equity position in the venture.

“Drexler violated a number of ethical rules about the relationship between a CEO and his board. He also may have violated SEC rules regarding the use of non-public material information. The private equity firms involved in the offer clearly had data about the company’s performance that was likely to affect its stock price. Shareholders had no such information,” McIntyre wrote.

Saying that Drexler is a text book example of a CEO who puts personal interests above those of the stock holders, McIntyre called for the J. Crew board and SEC “to punish Drexler for his actions by dismissing him and conducting a board and requesting a federal investigation of the events that led up to the sale.”

Lawsuits: J. Crew ‘Substantially Undervalued’

The deal also has instigated several class action lawsuits from shareholders who claim the buyout “substantially undervalues J.Crew, with the stock trading as high as $49.91 per share as recently as April 23.”

The filing also reveals that Drexler will serve as company chairman and chief executive for an initial period of four years, subject to annual renewal for another year at a time. employment contract of four years, which can subsequently be renewed for a year every year. He will also receive $200,000 in base salary, with an annual bonus of up to $800,000. Drexler is expected to roll over roughly $99.5 million worth of equity into the TPG deal. He will also receive nearly half of the new shares and options to be made available under a new employee compensation plan.

J. Crew shares have traded above the offer price, possible an indication that investors expect a richer offer to emerge before the January 15 “go-shop” deadline. The shares closed at $44.04 on Monday.

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