Valuations, lawsuit hamper Hanover

Thanks to a November merger agreement, New York investment firm Chelsey Direct will most likely get its way in taking Weehawken, NJ-based Hanover Direct private. But Hanover, whose brands include home decor catalog The Company Store and apparel books Silhouettes and International Male, first has to settle a lawsuit filed by shareholders claiming that the price offered by Chelsey is “grossly unfair.”

In November, Chelsey — which already owns 77% of Hanover’s common stock and 92% of its voting stock — agreed to merge with the $407.4 million Hanover for $0.25 a share in a $1.77 million transaction. That price is $1 per share lower than the $1.25 that Chelsey had offered to shareholders in February 2006.

On Dec. 22, two Hanover shareholders filed an amended complaint in the Delaware Chancery Court alleging that the Hanover directors had conflicts of interest in approving the agreement with Hanover. The plaintiffs, Glenn Freedman and L.I.S.T. Inc., say that not only is the offered price too low but also that the defendants, which include Chelsey, Hanover, and Hanover’s directors, breached their fiduciary duties of due care and loyalty to the minority shareholders as well as their duty of full disclosure.

At the center of the lawsuit is a valuation analysis on Hanover’s worth conducted by New York investment bank Goldsmith, Agio, Helms & Lynner. The analysis states that because Hanover’s debts outweighed its assets, the company had no value. In the court papers, the plaintiffs allege that on Nov. 8, Goldsmith Agio issued the valuation to Hanover’s board of directors without giving any weight to the market price of its common stock, which was trading at $1.30 a share.

The plaintiffs seek class certification on behalf of other minority shareholders, an injunction against the consummation of the proposed merger, or damages from Chelsey if the transaction goes forward. Neither Hanover nor Goldsmith Agio returned calls for this story.

Hanover shareholders had thought that Chelsey’s offer of $1.25 a share in February 2006 was too low, given that Hanover’s stock was trading at $2.80 a share at the time. Chelsey then hired an independent committee, which hired New York-based auditor Houlihan, Lokey, Howard & Zukin as Hanover’s financial advisor. Houlihan determined a value of $1.18-$3.10 per share for Hanover’s common stock based on projected levels of earnings before interest, taxes, depreciation, and amortization (EBITDA).

Chelsey subsequently withdrew its offer, saying that Hanover’s EBITDA had decreased due to declining productivity in its new distribution center, increased delivery costs after its shipper filed for bankruptcy, and higher paper and postage costs.

That Chelsey now wants to buy the shares of Hanover it didn’t already own, after Goldsmith deemed the company worthless, strikes at least one observer as suspicious. “I’m always leery when someone tells me something is worthless but then wants to buy all of it,” says a source who spoke on condition of anonymity.

Another source worries about the effect of Chelsey’s and the shareholders’ actions on Hanover. “All the surrounding issues, valuations, and lawsuits are dragging the company down,” says the source, who also requested anonymity. “They’ll lose good people and vendors, and banks will always be looking at it with a jaundiced eye.”

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