Once Again, Financing Trumps Price in Auctions

Don’t you just love a good “Background of the Offer” story? It’s just like Days of Our Lives, only written by M&A lawyers. Exciting stuff.

This week we got a peek at the action leading up to Advent International’s agreement to purchase mall clothing retailer Charlotte Russe. We knew there would be some juicy details since buyout firm KarpReilly LLC had made a play for the company that went awry.

This episode of Days of Our Private Equity Lives shows that once again, financing trumps price. Advent International won the auction with a lower bid because, according to the filing, “the greater certainty of closing under the Advent proposal outweighed the $0.25 per share difference in price between the two proposals.”

We saw the same phenomena earlier this year when Anheuser Busch sold KKR its Korean beer company, Oriental Brewery. Sources told peHUB that KKR’s final bid was lower than two rival bids from local firms Affinity Equity Partners and MBK Partners, but KKR won the auction because its debt financing was guaranteed.

So Advent International will purchase Charlotte Russe for $17.50 per share, or $38- million. That deal did not occur in a linear fashion. It started in late 2007, when KarpReilly approached the company about a sale. Charlotte Russe said “no thanks.”

A year later, in August 2008, Advent International approached the company and received the same answer-“no thanks.”

Then things got interesting. In November 2008, the company’s stock had fallen to a 52-week low of around $4 per share. KarpReilly took its interest public, making an offer between $9.00 and $9.50 per share, or $200 million. In a 13-d filing, KarpReilly stated that it may want to pay even less for the company. Charlotte Russe’s board rejected the offer as too low, and KarpReilly withdrew its bid.

A month later, Advent made a new offer of between $10 per share and $12 per share, and Charlotte Russe decided, hell, let’s open this up for everyone. The company announced it was reviewing strategic alternatives, using Cowen & Co. as its advisor.

Char-Ru received no shortage of interest. In February of this year, the company contacted 79 potential suitors, forty of which signed confidentiality agreements. No word on whether that group include KarpReilly, or if the firm was purposely excluded because of its lowballing tactics. The company received preliminary indications of interest (IOI) from five bidders. Advent’s IOI was $13 per share to $15 per share in cash. The rest of the bids were in the $10 per share and $12 per share range.

Advent and two other bidders conducted due diligence. Meanwhile KarpReilly, which built up a minority stake in the company, filed a proxy nominating three candidates to Charlotte Russe’s board of directors, saying it was “skeptical” of the Board’s process to pursue a sale of the company. Charlotte Russe’s management basically told shareholders to ignore them.

A month later KarpReilly withdrew its board nominees.

One suitor dropped out, and the bidding war between Advent and “Bidder B” began.

Advent bid $13 per share in cash with no financing contingencies. Bidder B bid $14.50 per share in cash with a financing and due diligence contingencies. In the second round, Advent raised its bid to $15.25 per share. Bidder B raised its bid to $15.50 per share.

The board decided its liked Advent’s terms and no-contingency finance better, especially after Bidder B asked for due diligence reimbursement before continuing negotiations on a non-exclusive basis.

The board said, “Better luck next time, Bidder B,” and entered into exclusive negotiations with Advent. The company formed a special committee to review the offer; meanwhile, Charlotte Russe’s stock price jumped from around $12 per share to $15 per share on positive earnings outlook. On August 1, the special committee decided that $15.25 per share was simply not sufficient.

Advent raised its offer, again, to $16 per share. The special committee didn’t blink. (Except President and Chief Merchandising Officer Emilia Fabricant, who was called out in the SEC filing as a doubter, since she considered the offer to be compelling.)

Advent “sharpened its pencils” and finally, on its August 23 deadline, confirmed its $17.50 purchase price for the purveyor of young women’s value-priced apparel and accessories.

And there you have it. The story of how Advent International met Charlotte Russe, or, How To Double Your Company’s Value in a Year.