Frederick’s of Hollywood to Merge with Movie Star

In a deal designed to lower sourcing costs and improve gross margins, women’s apparel cataloger/retailer Frederick’s of Hollywood will merge with intimate apparel designer/manufacturer Movie Star. The transaction is expected to close in the second quarter of 2007 and is subject to approval by Movie Star shareholders and other customary closing conditions.

The combined company will have revenue approaching $200 million. Frederick’s generated approximately $139 million in revenue for its fiscal year ended July 29, 2006. For the fiscal year ended June 30, 2006, Movie Star had revenue of approximately $51 million. The combined company will be called Frederick’s of Hollywood Group.

Linda LoRe will continue as Frederick’s CEO, and Melvyn Knigin will continue to serve as Movie Star’s chief executive.

Frederick’s new store designs—the company plans to open approximately 50 more Frederick’s of Hollywood stores during the next three years–are expected to drive top-line growth. New York-based Movie Star’s sourcing capabilities are expected to help increase gross margins and improve operational efficiencies.

“This merger is a very interesting combination,” says David Solomon, managing partner at New York–based investment bank Goldsmith, Agio, Helms. “Movie Star designs and sources women’s intimate apparel to low-end mass merchandisers such as Sears and Wal-Mart. Then you have Frederick’s, which is a brand, but it sources product through various places. It’s my guess that Movie Star has lower sourcing costs than Frederick’s.”

But with the merger, Solomon continues, “Frederick’s now can source product and Movie Star can design and build product for Frederick’s but get higher margins than by selling to the likes of Wal-Mart. When you put it together it has a lot of capacity to grow. It’s a marriage made in heaven.”

Under the terms of the definitive merger agreement, which has been unanimously approved by each company’s board of directors following the recommendations of special committees of each company, Frederick’s shareholders will receive approximately 23.7 million shares of newly issued Movie Star common stock.

In connection with the merger, Movie Star has agreed to issue to its shareholders nontransferable rights to purchase an aggregate of $20 million of new shares of Movie Star common stock. The combined company will also seek to refinance both companies’ existing bank facilities and Frederick’s term debt on more favorable terms.

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