UPDATE: Genesco sends testy letter to Finish Line

Genesco Inc. this afternoon sent a letter to Finish Line Inc. saying it must not “continue to stall” and should move forward with completing its $1.5 billion cash buyout of the Tennessee company.

The letter comes in the wake of recent moves by Finish Line and its bankers-New York-based UBS Financial Services Inc.- suggesting they’ll try to wiggle out of the transaction on the grounds that Genesco underwent a “material adverse” change when it reported a steep quarterly loss on Aug. 30.

Finish Line in June agreed to buy Genesco, parent of Journeys, Hat World and other mall retailers. When it signed the deal, Finish Line announced that UBS had provided a “commitment letter” to provide up to $1.6 billion in financing.

After Genesco reported a $4.2 million quarterly loss, Finish Line publicly expressed disappointment with Genesco’s performance and said it was exploring its options under the merger agreement.

UBS is taking a similar stance. In a letter Finish Line made public Sept. 14, UBS wrote: “While we continue to pursue this matter in good faith, we are extremely concerned about the apparent deteriorating financial condition of [Genesco].”

Earlier today, Finish Line announced that UBS was freezing financing until it further scrutinizes Genesco’s financial condition.

Both Finish Line and UBS have the right to walk away if Genesco undergoes a material adverse change, though analysts are skeptical the quarterly loss is serious enough to qualify.

In a letter sent today to Finish Line CEO Alan Cohen, Genesco CEO Hal Pennington said neither Finish Line nor UBS has legitimate grounds for backing out. And he accused UBS of acting in bad faith.

“It is clear from their own statements that they are looking for a way out of their commitment-in our view, not because of Genesco’s results but because the upheaval in the credit markets makes this deal less profitable for them.”

In the letter, Pennington urged Finish Line to press UBS to live up to terms of the commitment letter.

Finish Line agreed to pay a rich price for Genesco-$54.50 a share-in part to outduel New York-based Foot Locker, which also was trying to buy it. Since then, credit markets have slid into disarray, stock markets have declined, and both Genesco and Finish Line have reported surprisingly bad summer sales.

Analysts say that even before the downturn, Finish Line might have overextended itself in trying to make the purchase. Genesco’s stock market value is about twice that of Finish Line.

Finish Line today said it had no further comment.

Genesco shares traded this afternoon at about $46, a sign few investors believed the purchase will close under the original terms.

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