- Sycamore Partners' financing agreement with Aeropostale is a negotiating tactic.
- Over a month has passed since the financing was announced and the deal has yet to be signed.
- Aeropostale's steeply declining stock price provides Sycamore with significant negotiating leverage.
- Aeropostale will be taken private to execute a turnaround outside the public markets.
On March 13, Aeropostale (NYSE:ARO) announced that they had agreed to a financing package from Sycamore Partners, which provided commitment letters that outlined the proposed transaction. Over a month has now passed since this announcement and no deal has been signed. My theory is that the financing deal with Sycamore Partners is a sham. Sycamore Partners is certainly in the camp of smart money and in order to show ARO a true picture of the market value of their company, Sycamore needed to let ARO see what their stock price would be without the buyout on the table. Since announcing the "financing agreement" on March 13, ARO's stock price has declined 37%, providing ARO's management and Board of Directors with a more realistic valuation picture. I believe Sycamore is now negotiating a buyout with the backdrop of a more realistic acquisition price, given the steep decline in ARO's stock price.
To put the delay in documentation execution in perspective, Fairfax Financial (along with three other investment groups) made a similar, albeit much larger, investment in BlackBerry and the documentation for that deal took a total of 9 days. These financing documents do not take over a month to draft or negotiate.
Sycamore did a similar "back-peddle" on the deal with Talbots in 2012. After multiple extensions of an exclusivity period based on acquisition price of $3.05, Sycamore announced that it was no longer pursuing an acquisition. Within one day, the stock price of Talbot's went from $2.60 to $1.28, dropping a whopping 50% on the back of this news. This occurred on May 25, 2012. Within one week, May 31, Sycamore agreed to acquire Talbot's for $2.75, saving Sycamore 10% on the purchase price. Allowing Talbot's to see how the market would price the company without a buyout on the table is a great negotiating tactic and something I believe Sycamore is doing with ARO also.
The reason Sycamore did not just "walk-away" from the deal with ARO this time is as simple as the old saying, "Fool me once, shame on you, fool me twice, shame on me." If Sycamore would have announced that they were no longer pursuing the buyout, I do not think that the market would have believed this tactic, and thus kept the elevated price with a speculative buyout premium embedded in the stock.
There are two other alternatives that might explain the delay in executing the financing documents.
1) Sycamore has been busy with its closing of the Jones Group, which was finalized on April 8. This alternative does have some plausibility.
2) Sycamore has decided it is going to merely walk away from this deal. If Sycamore had decided to walk away from any transaction, I believe they would have liquidated their holdings and in doing so would have been required to file an amended 13-D. No filing has been made.
In the end, I think ARO will still be taken private because it provides Sycamore with the breathing room to focus on a turnaround outside of the public markets (see Rue21 and Dell for recent examples).