Court Orders Shoe Companies to Pair Up

A Tennessee court tells The Finish Line it must complete its acquisition of financially troubled Genesco. The case is the latest in a growing number of efforts by companies to back out of planned mergers and acquisitions.

Genesco Inc. says the Chancery Court for the State of Tennessee has ordered The Finish Line to complete its previously agreed-upon $1.5 billion acquisition. The court declared that Finish Line is not entitled to invoke December 31, 2007, termination procedures of the merger agreement.

“We are gratified by Chancellor Lyle’s order,” says Hal N. Pennington, chairman and CEO of Genesco.

The Finish Line says it is disappointed with the ruling, is studying the court’s decision, and is considering its options, including the possibility of an appeal.

In June the shoe retailer agreed to acquire Genesco, a shoe and clothing retailer, for $54.50 per share in cash, or about $1.5 billion. On September 14, The Finish Line said it had received two letters from UBS that raised concerns about Genesco’s financial performance, and that UBS had decided to defer any further work on the closing of the deal pending the results of its analyses of Genesco’s financial condition.

Two weeks later, Genesco filed a suit in Tennessee Chancery Court seeking an order requiring The Finish Line to complete its acquisition. The Finish Line responded by asserting that it had complied with its obligations under the sale agreement, but that its requests to Genesco for financial and other information and for access to Genesco’s CFO and financial staff had not been met.

According to Genesco, the order does not address issues related to the solvency of the merged entity. That issue will be determined by a New York court in a lawsuit filed by UBS.

“Although the Chancellor left open the issue of solvency brought by UBS in a New York lawsuit, she nevertheless noted ‘from the proof presented to it, this Court concludes that the combined entity can succeed,’” says Pennington. “We agree.” The Finish Line notes that if the New York court determines that the merged entity would be insolvent, the merger will be halted.

This is not the first deal to wind up in the chancery courts in recent months. Earlier this month, United Rentals said Cerberus Partners LP will pay $100 million to terminate its agreement to buy the equipment-rental company several days after Delaware Court of Chancery Chancellor William B. Chandler III ruled that Cerberus could cancel the deal.

Other deals have fallen apart as a result of the deteriorating credit markets. In October, Kohlberg Kravis Roberts & Co. and Goldman Sachs Group Inc. decided not to complete their $8 billion acquisition of Harman International Industries Inc. Similarly, an investor group led by buyout firm J.C. Flowers & Co. abandoned its $25.3 billion deal to buy SLM Corp., after the company refused a lower offer.

A lawsuit related to Flowers’s decision is currently pending in Delaware Chancery Court, according to Bloomberg.

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