Shareholders Approve $3 Billion J. Crew Buyout

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New York–J. Crew stockholders agreed today to the controversial $3 billion private equity buyout that had has been the subject of criticism and lawsuits since the deal was announced last November.

The deal, which is expected to close on March 7, put J. Crew Group into the hands of Chinos, an affiliate of private equity firms TPG Capital and Leonard Green & Partners, who will acquire the company’s stock for $43.50 per share. The vote was 41.1 million, or about 64% of its outstanding stock, in favor of the deal and 13.3 million against, according to the Wall Street Journal.

Right up until the vote, J. Crew executives had mounted a campaign to keep shareholders from rejecting the bid especially after Institutional Shareholder Services (ISS), a respected proxy advisor, issued a report last week that called the deal a “less-than-compelling” strategic rationale. ISS also speculated the buyout was too low and that J. Crew’s value was between $47.30 and $55.76 a share.

Report Urged Shareholder to Reject the Deal

ISS also questioned the “meaningfulness” of the go-shop provision, which allowed J.Crew to solicit higher offers. A J. Crew special committee had negotiated a 53-day go-shop period with the private-equity firms, which was extended for an additional 30 days in response to shareholder litigation and ended Feb. 15. Although Sears Holdings and Urban Outfitters purportedly were interested at one point, no rival buyers for J.Crew emerged.

Millard “Mickey” Drexler, J. Crew’s ceo, who will remain at the company, was also criticized for his role in the deal, too. Several shareholder lawsuits were filed protesting lawsuits protesting the share price and charging that Drexler had breached his fiduciary duties to investors.

Most notably, Drexler negotiated the potential sale for nearly seven weeks before he informed the board of his talks, J. Crew said in a securities filing. “Advisers in other management-led buyout talks have pointed to the J. Crew situation as the prime example of what not to do,” The Wall Street Journal said.

Since coming to J. Crew from The Gap Inc. in 2003, Drexler’s “hands-on approach” to the company including selecting apparel styles, resulted in sales doubling to more than $1.5 billion and pushed the stock up 100% since the company’s initial public offering in June 2006. Under terms of the buyout, Drexler stands to gain more than $200 million from selling his stake while keeping some ownership in a new closely held J. Crew.

Responding to the ISS report, J. Crew called the report “deeply flawed in its analysis and conclusions, and TPG’s offer reflects “a full and fair price for J.Crew’s shareholders.”

“Unfortunately, ISS’s report is based on flawed analyses, and we believe that ISS has reached the wrong recommendation,” said Josh Weston, chairman of the special committee of the board of directors. “The special committee ran a thorough process including analyzing the risks and rewards of all alternatives. This process resulted in a premium offer that provides immediate and certain value to J.Crew shareholders.”

Besides the J. Crew deal, ISS has seen shareholders vote against its recommendations in proxy fights or shareholder votes involving Barnes & Noble, Dollar Thrifty and Dynegy.

Since the buyout plans were announced last year, several hedge funds bought stakes in J.Crew at a price above the TPG/Leonard Green offer. A vocal critic of the deal, Mason Capital Management disclosed it had acquired a 6.5% stake in J.Crew in January and apparently voted against the deal. Earlier this month, Paulson & Co. said it owned a 9.4% stake in J.Crew but supported the buyout as did other major institutional investors, including Fidelity Management and BlackRock.

New Distribution Center Planned

Meanwhile, J. Crew plans to expand its distribution center in Lynchburg, Virginia. The retailer owns a 262,000 square foot facility and leases a 63,700-square-foot center where it houses the call center and order fulfillment operations of its direct channel business.

J. Crew’s distribution has been in Lynchburg for 25 years, according to Tony Brown, senior vice president, global supply chain. The expansion will add 100,000 square feet to the larger center, and create 177 new jobs.

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