$60 Million Buyout
April, 17 2003
The Daily Deal, 04.17.03
Vyvyan Tenorio
The $60 million buyout follows two years of losses at the mail-order retailer, which Freeman Spogli tried to purchase in 1995.
Struggling with losses for two consecutive years, catalog and direct marketer Lillian Vernon Corp. said Wednesday, April 16, that New York private equity firm Ripplewood Holdings LLC is acquiring it for about $60 million.
Ripplewood will pay $7.25 per share in cash, a hefty 75% premium over the $4.20 close Tuesday. However, this represents a 22% discount on the $9.32 book value as of the quarter ended Nov. 23, which was, in turn, down from $11.54 a year ago.
Ripplewood's offer is a far cry from the unsuccessful $19 per share acquisition bid in 1995 by another New York private equity firm, Freeman Spogli & Co., which valued the company at about $190 million. But that was when the Rye, N.Y. company's catalog business, known for its specialty personalized merchandise, was still doing relatively well. Ripplewood will finance much of the equity with a small, undisclosed minority investment from its New York partner, ZelnickMedia, a media and entertainment company.
ZelnickMedia's founder, Strauss Zelnick, will manage the company as the new chairman. He will replace founder and chairwoman Lillian Vernon, who retains a 5% stake and will continue to promote the company she founded 52 years ago. Vernon and her son, David Hochberg, along with several foundations, controlled 40% of the company previously.
The transaction, which the board has approved but is still subject to shareholders' approval, is expected to close by July 31.
Bear, Stearns & Co. advised Ripplewood and ZelnickMedia, while Goldman, Sachs & Co. advised Lillian Vernon. Salon, Marrow, Dyckman & Newman LLP's Joel Salon was the company's counsel. Simpson Thacher & Bartlett's Daniel Clivner in the Los Angeles office represented the investors.
Lillian Vernon had been seeking buyers privately since the Freeman Spogli offer fell through due to a financing snag. It has entertained about a handful of undisclosed offers in the last year, according to COO and CFO Richard Randall, who returned to Lillian Vernon after being CFO for Coach Inc., which he took public in 2000.
The company's revenues have steadily deteriorated in recent years due to the weak economy, severe competition and increased costs from printing, paper and postage, Randall said. "We had to find a way to neutralize the impact on the company," he added.
In the last fiscal year ended Feb. 2002, it posted a $9.1 million loss, compared with a net loss of $1.4 million in 2001. Its stock was trading at $7.08 at midday Wednesday, up 2.88%.
"They've been through these cycles before, so I'd have expected them to turn things around, but more losses are anticipated for this year as well," according to Derek Leckow, senior investment analyst at Chicago's Barrington Research Associates Inc.
The investors see opportunities in Lillian Vernons' direct marketing business as a platform for its turnaround and expansion. Zelnick, who previously headed Bertelsmann AG's BMG Entertainment's direct marketing operations, one of the largest in the United States, believes his experience is pertinent to Lillian Vernon's retail business.
"Clearly this has elements of retail, but we see direct marketing as a media business, the same way Barry Diller redefined home shopping television from a retail business to a media business," he said, referring to the USA Interactive chairman and CEO.
He added, "The opportunities for growth and line extensions are entirely related to media." These include licensing and merchandising, and establishing relationships with one or more home shopping networks.
But a turnaround is the priority, Randall said. The company, which last year mailed about 162 million catalogs to past and prospective customers, plans to rationalize circulation.
"If we can reduce costs in the number of catalogs we send out without a significant impact on the topline, that will help return the company to profitability," he said.