UBS continues to try to back out of financing the $1.5 billion merger between rival shoe retailers Genesco and Finish Line, in another sign that the global credit crunch continues to trouble Wall Street’s biggest players.
Finish Line, which has agreed to buy Genesco for $54.50 a share, disclosed yesterday that the Swiss bank has stopped working on the remaining closing documents for the deal pending a further analysis of Genesco’s financial condition.
In a break with its main adviser, Finish Line said it continues to “evaluate its options in accordance with the terms of the merger agreement” and intends to continue working on the closing documents.
Finish Line also disclosed recently that it hired Moelis Advisors, run by former UBS rainmaker Kenny Moelis, for further financial advice in what some believe is another sign that the athletic retailer is not fully on the same page as its lead financier.
UBS declined to comment.
Genesco chief Hal Pennington fired off a terse response to Finish Line CEO Alan Cohen yesterday demanding that he and his company meet the conditions to close the merger.
“Clearly, UBS’ most recent request comes within neither the spirit nor the letter of our agreement,” Pennington said. “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.”
Finish Line is paying for Genesco almost entirely with debt financing provided by UBS – a move that will result in a highly leveraged company.
Genesco, which reported a surprise $4.2 million second-quarter loss earlier this month, maintains that no material adverse event, or MAE, has occurred that would allow Finish Line to walk away from the deal.
What’s more, a specific clause in the merger agreement states that neither party can back out because of declining performance.
“Finish Line simply has buyer’s remorse, and has suddenly realized along with its bank UBS that they are taking on too much leverage on this deal,” said Steven Davidoff, a law professor at Wayne State Law School. “By Genesco sending this letter they are putting Finish Line on notice that they are going to have to face litigation if they want out of this deal.”
UBS and other banks that have agreed to finance highly leveraged merger deals are facing difficulty reselling the debt to investors amid the global credit crisis.
Several banks have taken large losses after being forced to lower the price of bonds and loans in order to make them attractive to investors.
Genesco’s stock has tumbled 18 percent since it announced the deal with Finish Line in June. Genesco shares rose 1.8 percent to $46.28 yesterday.