Genesco Caught Between Finish Line and UBS

The Genesco Inc. (GCO) - Finish Line Inc. (FINL) merger has become a rare situation wherein the acquiror now finds itself caught in the middle it financing source and the target company. Admittedly, this publication has very little frame of reference for this scenario, so it is extremely difficult to confidently project the outcome at this point.

First, GCO sent a strongly-worded and direct letter to FINL Thursday demanding that FINL quickly complete the transaction under the terms of the merger agreement. The most compelling passage in the letters the following:

Clearly, UBS' most recent request comes within neither the spirit nor letter of our agreement. It is clear from their own statements that they are looking for a way out of their commitment -- in our view, not because of Genesco's results but because the upheaval in the credit markets makes this deal less profitable for them. We are not going to allow the litigation consulting firm they have hired to go on a fishing expedition.

While this publication completely agrees with GCO's assessment of UBS' motives, this does not alter the fact that UBS has the resources and ability to continue to stall this deal if it wishes to do so. No amount of complaining and/or threats from GCO can change this basic fact. While ethically misguided, UBS is certainly not going to sacrifice the profits alluded to by GCO without taking all the necessary steps available.

Second, UBS has already taken the first and most significant step in ceasing the closing process by withholding the necessary documentation from FINL. Although there has been no legitimate indication that UBS is demanding a renegotiation of the merger agreement, it must be assumed that this is the ultimate goal, as an attempt to terminate the deal would obviously result in lawsuits from both GCO and FINL.

Finally, FINL has not issued any sort of comment at the time of this entry. This is not surprising given, again, that the company is truly being pulled in opposite directions. The only statement it can make at this point is that it is working with both parties to resolve the situation, which is presumably is.

It will be repeated that GCO's poor Q2 earnings is not a justification for creating this situation. This much should be obvious. And in a legal battle, this concept should be obvious as well. For this reason, it is currently not expected that FINL, under UBS' manipulation, will not attempt to terminate this merger agreement. Just how FINL will navigate this situation is unclear, but the best option would be to bring all the parties to the negotiating table and attempt to reach a revised agreement. If UBS is confronted with legal actions from both companies, it should be more than willing to fulfil its financing obligations.

Disclosure: We have no positions of any kind, in any security. We are a completely neutral source of research and analysis.