Apollo gets Linen ‘n Things for $1.3bn

Apollo Management has agreed to acquire Linens ‘n Things for $1.3bn, but based on hurdles set up by the lenders, the company will need a strong performance in the fourth quarter before the deal can go through.

Private equity’s love affair with retail was again confirmed, when Linens ‘n Things announced a deal to be acquired by Apollo Management in roughly $1.3 billion (€1.1 billion) transaction. The public-to-private deal, which is expected to close in either the first or second quarter of 2006, values Linens ‘n Things’ stock at $28 a share.

Linens ’n Things has agreed to be sold to Apollo Management for $1.3bn.

The Clifton, New Jersey-based home furnishings retailer indicated it was seeking strategic alternatives near the end of September. The company first announced a possible sale alongside a depressing performance update that forecast a break even quarter for the retailer (Linens ‘n Things, a few weeks later, did end up reporting EPS of $0.02 for the third quarter).

The transaction, however, is no sure thing. According to the press release, the company will need to reach certain performance targets in order to see the deal reach the finish. The lenders, Bear Stearns & Co. and UBS Securities, have established a market MAC clause, and the debt financing is contingent upon Linens ‘n Things generating at least $140 million in EBITDA for the full-year 2005, and its same-store sales for the fourth quarter cannot show a dip any greater than six percent versus last year.

Linens ‘n Things will need to have a robust holiday season in order to surpass those goals. In the deal’s announcement, the retailer indicated that for the first 39 weeks of 2005 – well past the year’s halfway point – the company had generated roughly $55 million in EBITDA, and its same-store sales for October dripped red with an 8.4 percent decline for the month.

The move by the lenders to establish the contingencies follows a high-profile case last month, in which a Bain Capital and Thomas H. Lee Partners proposed buyout ended abruptly after the senior lenders pulled out. The firms had agreed to acquire School Specialty, but the deal ended up unravelling after the sponsors followed the lenders’ lead and aborted the deal after renegotiation attempts failed.

Linens ‘n Things has been battling against downward momentum in its financials, and has so far found 2005 to be a difficult year. Norman Axelrod, the chairman and CEO of Linens ‘n Things, noted in the company’s third quarter earnings announcement: “We experienced significant traffic declines…as the initiatives we had undertaken to emphasize fashion and better price points in our merchandise assortment resulted in a weaker value perception to our guests.”

Linens ‘n Things full-year earnings report is scheduled to be announced in early February.

Peter Copses, a senior partner at Apollo, led the deal for the firm. Like other retail transactions announced this year, Apollo has aligned itself with a real estate group, partnering with NRDC Real Estate Advisors I, LLC for the acquisition. NRDC is a joint venture between the Apollo’s real estate arm and National Realty & Development Corp.

Linens ‘n Things was advised by Credit Suisse First Boston and Lehman Brothers, while Pitney Hardin served as legal counsel to the retailer. Apollo was advised by law firm Morgan Lewis & Brockius.

The retail sector has been a hotbed of activity for private equity during the past year. Toys ‘R’ Us, Mervyn’s, Neiman Marcus and ShopKo are just a small sampling of large retail groups that have gone to private equity buyers recently. Apollo, for its part, has a strong track record in the sector with past investments in General Nutrition Centers, Rent-A-Center, and Zale Corp., among other companies.

Calls to Linens ‘n Things and Apollo Management were not returned by press time.