UPDATE: Finish Line may claim ‘material adverse’ change

The Finish Line Inc.’s $1.5 billion agreement to buy Genesco Inc. gives the Indianapolis-based retailer the right to back out if the Tennessee company’s business suffers a “material adverse” change.

The Indianapolis company appears poised to seize on the language. In a press release late this morning, it said it was “disappointed” with the $4.2 million loss that Genesco reported hours earlier. “Consistent with its responsibilities to The Finish Line’s shareholders, the company is evaluating its options in accordance with the terms of the merger agreement.”

If Finish Line attempts to trigger that clause, Genesco likely will dispute that position and attempt to force it to close under the original $54.50-per-share terms. The parties also could reopen negotiations and reduce the price.

In a conference call with analysts prior to Finish Line’s announcement, a Genesco official denied that his company’s disappointing quarterly results would give Finish Line the right to exercise the material adverse change clause.

The merger agreement allows Genesco to cancel the deal if it pays $46 million. There is no similar fee for Finish Line. But it’s obligated to close except under limited circumstances, such as triggering of the material adverse change clause.

Finish Line in June negotiated the purchase, in a bid to reduce its reliance on the Finish Line chain. Genesco operates a host of mall retailers, including Journeys and Hat World.

Genesco shares tumbled late this morning, a sign investors are skeptical the deal will close at the original price. Genesco shares were trading early this afternoon at $43.87, down $6.23, or 12 percent, on the day.

Genesco’s stock price is now 20 percent below what Finish Line had agreed to pay.

Finish Line shares rose today. They were trading at $6.30, up 76 cents, or 14 percent.

Since the companies cut their deal, credit markets have slid into turmoil, raising questions about Finish Line’s ability to complete the heavily leveraged purchase.

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