Catterton Back in the Game for Restoration

If you’re keeping track of the tug-of-war for Restoration Hardware, private equity firm Catterton Partners has gained some ground on Sears Holdings Corp.

The home furnishings cataloger/retailer announced Jan. 24 that it amended its previously announced merger agreement with certain affiliates of Greenwich, CT-based Catterton Partners. According to the terms of the latest agreement, all outstanding shares of Restoration Hardware, other than those exchanged by certain stockholders participating with Catterton in the transaction, will be acquired for a price per share equal to $4.50 in cash.

The $4.50 per share cash consideration represents a 68% premium to the closing price of Restoration Hardware common stock on Nov. 7–the last trading day prior to the initial announcement of the original merger agreement. The total equity value of the transaction is about $179 million.

The amendment extends the outside termination date for the merger agreement from April 30 to June 30. It also changes the definition of material adverse effect to increase the likelihood that the transaction will close if Restoration, which includes about 100 stores, catalogs, and a Website, experiences weakness in its results.

What’s more, Catterton Partners, through its affiliates, has provided a $25 million subordinated loan to Restoration Hardware for working capital purposes. The loan is not contingent on the closing of the acquisition and has been funded.

Restoration Hardware’s board of directors has approved the
amended merger agreement and recommends that the Corte Madera, CA-based company’s stockholders adopt it. The committee of independent directors, with the assistance of its advisers, will solicit proposals from third parties for an additional period of 35 days ending Feb. 28.

Where does all this leave Sears? Down, but not out. The Hoffman Estates, IL-based parent company of retailers Sears and Kmart and apparel cataloger Lands’ End had submitted an offer of $4 a share for Restoration Hardware in late October. This prompted Restoration on Nov. 8 to agree to accept a $267 million offer—$6.70 a share—from Catterton Partners.

Sears then bought a 13.7% stake in the home decor merchant, paying $30.2 million for 5.3 million shares of Restoration Hardware, according to a Nov. 19 Securities and Exchange Commission filing. On Nov. 26 Sears upped its offer to $6.75 a share in cash for the cataloger, and it seemed to be the frontrunner in the deal.

Sears spokesperson Christian Brathwaite declined comment regarding the latest development, but Lee Helman, managing director with New York-based investment bank Financo, doubts it’s a done deal. “I do not think the company has sold for $179 million to Catterton just yet,” he says. “Sears has some time to revise its offer, and I expect it will.”

Given the sharp decline in stock price, Helman isn’t surprised the selling price came down significantly. “I expected to see this happen–and am a little surprised that the price held up as high as it is, given that it recently traded down around $3.60 per share,” he says.

Stuart Rose, managing director with Wellesley, MA-based investment bank Tully & Holland, says Catterton “makes better sense than Sears as an acquirer. As a private entity, they can make whatever changes are required–closing stores, layoffs, etc. much easier than Sears, and don’t have to be slaves to quarterly earnings.”

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