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Rue21 Merger Arbitrage


nnayyar
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Sorry for the slightly sloppy post but RUE is offering 2.8% gross and likely 15% annualized. Closing is expected in early October. The spread is due to risk of financing, 800MM between 3 banks that had trouble on initial marketing but is now being re-marketed with higher incentive fees, close to 68MM:

 

http://uk.finance.yahoo.com/news/bankers-market-struggling-rue21-buyout-133734995.html

 

If the financing can't be placed, the banks have take down the debt. Now 800MM split between 3 banks is around 300MM each, which doesn't sound like a completely unreasonable sum to me? But more importantly, changing of the terms and increasing incentive fee, i have a feeling they will be more persuasive in placing it.

 

Initially there were fears of declining business at RUE21 however the company has identified this before the deal was announced and expect improvement into holiday season. The buyers, APAX also seem to agree as they voted for the $42 deal as is without alterations. Not to mention they are opening a new PE fund and need deals to start charging fees!!

 

I probably missed some facts but feel free to ask questions, i wanted to get this out and this represents one of the most attractive and quickest deals out there...

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Well this deal got hairy in a hurry, after releasing further declines in SSS the spread jumped to over 6%+. Dealbook had an interesting article (ahem hit job) today:

 

http://dealbook.nytimes.com/2013/09/30/how-the-deal-for-rue21-could-fall-apart/?_r=0

 

The article has a negative bias but it's always good to understand the opposite view. I disagree in the following way:

 

1) APAX stands to lose much more then the $68MM termination fee. APAX/SKM currently own 30% of the equity in RUE which is likely close to completion, i.e. the point of time where a PE fund winds down and performance fees are calculated. If the deal was to break SKM/APAX is set to lose 7MM shares or around 70-100MM in value (and any associated performance fees)

 

2) Each example given by the author of a broken deal occurred in 2008. Right before Lehman brothers collapsed. Um...exactly a great time for the banks.

 

I should point out that the author does make a very good point on the insolvency clause. But i think the author was looking for fodder to pitch points made in his book. Though to be honest, I am obviously talking my book as well.

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