No wonder investors are fleeing both Finish Line Inc. and Genesco Inc., the Tennesseebased company that, until recently, Finish Line desperately wanted to buy.
Finish Line agreed in June to acquire the fellow mall retailer for $1.5 billion in cash, or $54.50 a share.
Now, though, Finish Line is so determined to get out of the highly leveraged deal that it suggests in a new court filing that the purchase would trigger its own financial ruin.
The Indianapolis company says that before the deal was signed, Genesco "intentionally or negligently" failed to disclose it had had a "disastrous" May.
Those results were an early sign that the company was "teetering on the brink of a deep and fundamental decline. Most troubling, this decline now extends across two quarters, strongly indicating that something has fundamentally changed in Genesco's business," the filing said.
"This fundamental change in Genesco's financial position also raises serious doubts that Finish Line and the combined company will be solvent following the merger."
Not the kind of statements that build confidence in either company.
On the one hand, the statements smear Genesco, parent of Journeys, Hat World and other chains-suggesting to the investment community that it's a complete mess. On the other, the Indianapolis company, which also has had earnings woes, isn't exactly endorsing its own financial firepower.
So no one should be surprised that shares in both companies have tumbled. Finish Line shares now trade for $3.05, off 79 percent for the year. Meanwhile, Genseco shares are fetching $31.35, 42 percent below the buyout price.
The big gap reflects what a huge mess the deal has become. Back in the summer, Finish Line heralded the purchase as a means to diversify away from the topsy-turvy athletic-shoe and apparel business.
But that was before credit markets slid into disarray and before both com panies rolled out surprisingly bad summer sales figures.
Analysts say the credit turmoil ratchets up Finish Line's interest costs on the deal. At the same time, it puts the company's banker, Swiss financial giant UBS, in an awkward spot. UBS, which agreed to provide Finish Line up to $1.6 billion in financing, likely would have to sell the debt package at a substantial discount if the deal moves forward, leaving it with a hefty loss.
All of which helps explain why lawyers for the key parties in the deal now are tangling in court in two states.
In September, Genesco sued Finish Line in Davidson County, Tenn., in a bid to force it to close the deal. This month, UBS sued Finish and Genesco in fed- court in New York , arguing that the combined company would be insolvent-thus triggering provision in the merger agreement giving it the right to yank financing.
Both UBS and Finish Line complain that Genesco's operating loss of $2.9 million in the quarter ending Aug. 4 came as a complete surprise.
One-third of the way into the quarter, before Finish Line agreed to the purchase, Genesco had projected a robust profit, UBS says.
According to Finish Line, weak results for that quarter and for the following quarter-which have not yet been publicly announced- constitute a "material adverse" change, thus giving it the right to jettison the deal.
In a filing, UBS accuses Genesco of fraud. It alleges that Genesco's senior officers had hatched a scheme "to sell their company before everyone knew that its financial condition was collapsing."
It's a stinging charge, one that angers Hal Pennington, Genesco's chairman and CEO.
"It is sad when a major international financial institution resorts to this sort of mudslinging in an attempt to get out of its contractual obligations and survive the meltdown in the credit markets," he said in a written statement.
Analysts say it's difficult to handicap what will happen next.
Investors who've knocked down Genesco's stock price appear convinced of one fact, however: Finish Line's once-ballyhooed acquisition isn't going to happen-at least not at the original price.