Friday morning, Deb Shops Inc. (DEBS), a specialty retailer of fashionable apparel, shoes and accessories for juniors, announced signing of a definitive agreement to be acquired by DSI Holdings LLC, an affiliate of Lee Equity Partners LLC, for $27.25 per common share, in an all-cash transaction. Total equity value of the transaction is approximately $395 million. This transaction is expected to close in the fiscal third quarter of 2007.
The Philadelphia, Pennsylvania-based Deb Shops, which operates 337 specialty apparel stores in 42 states under the DEB and Tops 'N Bottoms names, noted that its board of directors has approved the proposed merger, which is subject to approval by stockholders and other customary closing conditions, including governmental approvals. Lee Equity Partners will be financing this acquisition with cash and new committed credit facilities.
Deb Shops also noted that Lee Equity has received commitments from Marvin Rounick, Warren Weiner and Jack Rounick, and certain of their respective affiliates, representing an aggregate of nearly 64.3% of the shares of company's common stock and all of preferred stock, currently outstanding, to vote in favor of this transaction. Following this merger, Marvin Rounick, Warren Weiner and Jack Rounick will not have any ownership interests in the company.
Deb Shops said that, after completion of this transaction, under Lee Equity's ownership, Allen Questrom will serve as its non-executive chairman and will provide significant strategic direction to its current senior management team. Marvin Rounick and Warren Weiner, current Executive Vice President, have also agreed to provide consulting services for a period of three years after the closing of the acquisition.
In connection with this proposed merger, Lehman Brothers acted as financial advisor and Morgan, Lewis & Bockius LLP acted as legal counsel to Deb Shops. Bear Stearns acted as financial advisor and Weil Gotshal & Manges LLP acted as legal counsel to Lee Equity. Barclays Capital will be the exclusive financing provider to Lee Equity for the transaction.
For the first quarter ended April 30, 2007, Deb Shops posted net sales of $83.8 million, up 2.9% from $81.5 million in the first quarter a year ago. First quarter net income was $2.6 million, versus $2.7 million in the prior year quarter, while diluted earnings per share was $0.18, compared to $0.19 in last year's first quarter. The company reported an 0.2% increase in May comparable store sales and 1.9% growth in June. Total sales increased 3.4% to $28.4 million in May and improved 4.1% to $25.9 million in June 2007.
Also, on May 24, 2007, Deb Shops announced that it is reiterating its fiscal 2008 guidance of sales in the range of $343 million to $348 million with a corresponding fully diluted earnings range of between $1.55 and $1.60 per share. These amounts are based on a projected low single digit comparable store sales increase and net new store growth of approximately 15 locations. Analysts polled by First Call/Thomson Financial expect the company to earn $1.58 per share on $345.17 million revenues.
Commenting on this acquisition, Thomas Lee, President of Lee Equity Partners, stated, "We are delighted to announce our acquisition of Deb Shops, a specialty retailer with significant growth potential, both in terms of revenues and operational improvement. Given our industry expertise in retail and our focus on post-investment operating improvement, we are excited to collaborate with Deb Shops existing management to refresh the store operational model and to execute a new store growth plan"
DEBS is currently trading at $27.08, up 40 cents or 1.50%.
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