Warrendale, PA—Rue21 is scheduled for a shareholder vote on Sept. 19 to decide whether the teen retailer will be acquired and taken private by Apax Partners in a $1.1 billion deal.
But given the latest earnings reported the retailer filed with the SEC, the May offer of $42-a-share, is approximately 11 times the expected $100 million of earnings before interest, taxes, depreciation and amortization (Ebitda). In May the value was only 8 times Ebitda.
Not helping matters is its third quarter earnings report which reflects some of the same difficulties with teen retailing that American Eagle Outfitters and Aeropostale posted recently.
Rue21 posted an 88% drop in its third quarter profit to $1.1 million, or 4 cents a share, compared with income of $9.1 million, or 36 cents a share a year ago. Net sales were up 13.5% to $229.3 million mostly due to new store openings. Gross profit was down and a “soft sales pattern” is expected to continue with August comparable store sales down 7.6%
“During that period the company took a strategic approach to managing merchandise margin and inventory levels and maintained a normal promotional cadence,” rue21 said in the filing, adding that it would be prepared for a “prolonged period of top-line weakness.” Business is expected to improve by holiday/fourth quarter
But according to the New York Post, JPMorgan and Goldman Sachs, which financed the deal, are “on the hook for tens of millions of dollars in potential losses on the financing commitments they made to back the buyout, sources said.”
While the banks agreed to finance the acquisition with debt and loans worth about $858 million at a “blended interest rate of as much as 8%,” the downturn in retail has pushed lending rates to higher levels, “exposing the banks to holding bonds and loans that are expected to plummet in value, sources said.”
Reportedly the banks tried to raise debt with rates above 9% but failed. “The banks will try again before the deal closes Oct. 14,” the Post reported.