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UBS is this week likely to reset the clock in on-going litigation between the investment bank and Genesco, whose takeover by Finish Line it agreed to finance last June, dealReporter has learnt.
UBS was expected to file an amendment to its complaint in the New York Court as early as Monday morning, updating it original complaint with comments regarding performance of the combined Genesco/ Finish Line Group for the last two months, supporting the notion that the combined group is heading for insolvency. While the amendments are expected to be minor, they will serve as a speed bump in the process which has dragged on for several months. The amended filing could delay Genesco’s ability to respond to UBS’s complaints by up to two months.
Genesco is unlikely to take a back seat role in the process and is expected to file an enhancer in response to UBS’s amended claim. This will entail asking for a motion of an expedited hearing in New York, which in turn could put the whole case on to a new schedule, likely to be announced soon after the Genesco’s request, it was said.
The case has already been to a Tennessee court, where Genesco is incorporated. There the Chancery Court Chancellor Ellen Hobbs Lyle ruled there was no reason why Genesco’s sale to Finish Line shouldn’t be completed, while asking Finish Line to ”use its reasonable best efforts” to find the financing to complete the deal.
Finish Line already said it is considering appealing Lyle’s decision and has 30 days to do so.
UBS has also filed suit against Genesco and Finish Line in a federal court in New York, arguing that financing this deal would creating an insolvent company.
Arguing an insolvency case could be challenging, say people following the situation. Even if the combined group underperforms its September projections by 20% along with fully flex financing, before discretionary financing, the merged group would be very close to cash neutral even in a tough recessionary environment, they say. The group could also rely on USD 150m of revolver and USD 1.1bn in financing from UBS. The financing package doesn’t have any meaningful covenants; the group can drive down 90% of their revolver without triggering any covenants.
Either on their own or under pressure from the court, the parties could be facing one of three scenarios: agree to complete the deal on terms that are different from the original terms of USD 54.50; a mutual agreement by all parties to walk away with some compensation to Genesco; or an out of court settlement.
For Genesco the certainty of the transaction or a significant payment versus the uncertainty of pursuing the court case is reasonably attractive in either case. Regardless of the outcome, Genesco will walk away with some sort of payment. However, nobody knows how monetary damages are calculated, the cost of financing or what discount UBS should offer in the changed leverage market.
It is expected that the total damages costs could include: premium lost to shareholders, consequential damages (no precedent case has been set here and it will be up to the judge to estimate “disruption costs”) as well as legal, accounting and M&A costs. Genesco is likely to argue for all three while Finish Line will only agree to legal, accounting and M&A costs. The other much simpler formula to estimate monetary damages, suggested by people following the situation, is the original offer minus Genesco’s value if the company was put on sale tomorrow.
Either way, if Genesco wins and is awarded substantial damages, the case is likely to go back to Tennessee where Judge Lyle could forgo mercy and force completion of the deal, which effectively would put Finish Line into insolvency, sources argued.
The temptation to settle out of court should, at this point, be strong. Proceeding in NYC or the subsequent proceedings in Tennessee, leaves things subject to a greater risk for all the parties involved, argued legal sources. The possibility of a settlement is not as lucrative for shareholders, according to one market investor. If Finish Line believes there is a possibility of getting monetary damages, it could agree with UBS to pay a hypothetical USD 200m and an additional USD 100m raised through UBS’s financing, providing that UBS agrees to pay one or two times leverage, the investor said. The problem is that this settlement would still be tax effective, with that a shareholder in the best case scenario would get USD 10-12 per share. “Most people will tell you today that Genesco only worth a high 10’s, maybe 20, even if you get a substantial settlement; you’re still talking a stock worth USD 32,”said the investor.
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