An acquisition that looked daring and bold when it was announced quickly blew up on Finish Line Inc.
The Indianapolis retailer agreed in June to buy Tennessee-based Genesco Inc.–parent of Journeys, Hat World and other mall
chains–for $1.5 billion in cash.
Finish Line's highly leveraged purchase of a company for twice its stock market value was intended to diversify the Indianapolis
company away from the topsy-turvy athletic-shoe business.
But within weeks of striking the deal, credit markets slid into turmoil, substantially raising Finish Line's borrowing
costs. Then, Genesco reported an unexpected second-quarter loss and Finish Line posted its own weak results–raising serious
questions about whether the combined company would have the earning power to service its debt.
Now, Finish Line and its financial backer, the Swiss financial giant UBS, are desperately trying to extricate themselves
from the deal.
Both charge that Genesco's downturn constitutes a "material adverse" event, triggering a clause in the acquisition
agreement giving them the right to walk away.
UBS also is accusing Genesco of fraud, charging that senior officers hatched a scheme "to sell their company before
everyone knew that its financial condition was collapsing."
Hogwash, says Genesco CEO Hal Pennington.
His company this fall sued Finish Line in an effort to force it to complete the deal. Genesco also is tangling with Finish
Line and UBS in federal court in New York.
Finish Line itself has had a dismal year, in part because of a fashion shift away from high-end athletic shoes. That, along
with the possibility that the company might be forced to close an acquisition that could destroy it, has taken a heavy toll
on its stock.
Finish Line shares now trade for around $3 apiece, down nearly 80 percent in 2007.