Cranberry-based rue21 agrees to $1.1 billion buyout offer

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The markets were expecting rue21, a Cranberry-based retailer that operates a chain of almost 1,000 teen clothing stores across the country, to be acquired -- so the company's major investor decided to do just that.

Private equity firm Apax Partners, based in London, has offered $42 per share in cash, a 23 percent premium to Wednesday's closing stock price of $34.12. The deal is valued at $1.1 billion.

Shares of the company immediately surged 23 percent, closing Thursday at 41.96, up 7.84.

If the sale goes through -- shareholders need to approve the deal, which is expected to close by year end -- rue21 will be private again and owned by the investment firm that was the majority owner when it went public at $19 a share in 2009. Apax has been an investor in rue21 since 1998.

But it's still possible another buyer could sweep in and offer more. Indeed, the company and Apax seem inclined to welcome bidders, noting in Thursday's announcement that there will be an initial 40-day "go-shop process starting today during which it will actively solicit, evaluate and potentially enter into negotiations with any parties willing to offer a superior acquisition proposal."

The company said the process provides for a "low termination fee of 1 percent (approximately $10 million) to be paid to Apax," and promised that CEO Bob Fisch is willing to work with any party that shows interest.

Willingness to accept such offers might help battle the shareholder lawsuits that typically follow such acquisition announcements over whether or not management got the best price. Several law firms quickly announced plans to investigate the case.

Randal J. Konik, an analyst with New York-based Jefferies LLC, welcomed the company's news with a report headlined, "Rue takeout ... we told you so; keep buying specialty retail!"

Mr. Konik had calculated in April that teen retailers Aeropostale, Abercrombie & Fitch, and rue21 were all attractive candidates for leveraged buyouts. "The rue deal confirms that private equity remains very active in the specialty retail space," according to his analysis Thursday.

"Over the past year, we have seen increased LBO activity within the sector (e.g. Hot Topic, Cole Haan) which we think is likely to continue given the significant cash balances at these companies, little to no debt ... and business models with consistent cash generation," he said.

In 2003, rue21 emerged from bankruptcy with fewer than 200 stores and grew using a strategy of offering inexpensive fashion to markets beyond the traditional malls and shopping centers populated by chains such as American Eagle Outfitters and Aeropostale.

The company Thursday gave preliminary results for the first quarter, which ended April 30, showing net sales rose 9.1 percent, but sales at stores open at least a year slid 4.6 percent from the same period a year ago. Earnings per share of 44 cents did not meet analysts' expectations of 48 cents, as calculated by Thomson Financial.

"This quarter rue21 was impacted by the same challenges that affected the entire industry -- unseasonably cool weather, higher payroll taxes and delayed tax refunds," Mr. Fisch said in the announcement. "All of these factors affected shopping patterns and resulted in a tougher quarter than we had forecasted in terms of sales growth."

Mr. Fisch noted the company's long-term objectives include growing the chain to more than 1,700 stores in the U.S. and opening an e-commerce operation.

Headquartered in Thorn Hill Industrial Park, rue21 employs more than 300 people in the Pittsburgh area and approximately 200 at its distribution center in Weirton, W.Va.

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Teresa F. Lindeman: tlindeman@post-gazette.com or 412-263-2018. First Published May 23, 2013 9:15 AM


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