Shoe retailer Genesco yesterday slapped rival Finish Line with a harshly worded lawsuit, demanding that its future partner close the $1.5 billion merger it agreed to three months ago.
The suit alleges that Finish Line, once eager to win a bidding war against Foot Locker for control of Genesco, now wants to back out over fears that it paid too much and that the global credit crunch will drive up the deal’s price even more.
“Despite it’s extreme initial enthusiasm, Finish Line has recently developed a case of buyer’s remorse,” Genesco, which owns the Journeys and Lids chains, said in its lawsuit.
Finish Line and Swiss banking giant UBS, which is financing most of the deal with debt, claim Genesco’s poor financial results last quarter breached a clause in the merger agreement, known as a material adverse event, or MAE.
UBS told Finish Line earlier this week that it has stopped working on the remaining closing documents for the deal pending a further analysis of Genesco’s financial condition.
However, a clause in the merger agreement specifically states that neither party can back out of the deal simply because Genesco fails to meet its performance goals.
Because of the enormous amount of debt used to purchase Genesco and the deteriorating performance of the shoe industry, some analysts believe that the combined company may be insolvent when the deal goes through. If that is the case, UBS may try to sue Genesco and its board of directors to get its money back, analysts said.
A source close to the deal said Finish Line must still complete the merger – no matter what.
Genesco’s stock, which has tumbled 18 percent since it announced the deal with Finish Line, rose 1.7 percent yesterday to close at $47.55.