Today's Finish Line Vote Not Last Word

September 17, 2007

Genesco Inc. shareholders this afternoon approved the company's $1.5 billion cash sale to locally based Finish Line Inc. But the deal is a long way from being done.

Both Finish Line and its bankers recently have said they might attempt to extricate themselves from the deal by claiming that Nashville, Tenn.-based Genesco Inc. has undergone a "material adverse" change.

The purchase agreement, signed in June, gives Finish Line the right to back out if that occurs. New York-based UBS Financial Services, which had committed to provide Finish Line up to $1.6 billion in financing for the deal, has a similar out.

Finish Line on Aug. 30 signaled it might try to back out, or at least negotiate a lower price. It said it was "disappointed" with the $4.2 million quarterly loss Genesco had reported earlier in the day and was "evaluating its options in accordance with the terms of the merger agreement."

UBS jumped into the fray this past Friday, telling Finish Line that it may have the right to pull financing.

"While we continue to pursue this matter in good faith, we are extremely concerned about the apparent deteriorating financial condition of [Genesco]," UBS said in a letter to Finish Line.

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 tumbled, and both Genesco and Finish Line have reported surprisingly bad summer sales.

Analysts say Finish Line might be overextending itself with the purchase of Genesco, which operates the shoe retailer Journeys, Hat World and other mall chains.

But they're skeptical that Finish Line and UBS have a legitimate claim to wiggle out of their commitments to go forward.

"Overall, it is clear that Genesco's troubles are far from company specific and are not excessive in comparison to its competitors'," Thomas Kirchner, portfolio manager for the Pennsylvania Avenue Event-Driven Fund, wrote on his personal blog.

Genesco denies its loss constitutes a material adverse change.

The deal is scheduled to close next month. Analysts say it's possible that the companies could negotiate new terms in the next few weeks.

Genesco shares are trading for $10 less than the price Finish Line agreed to pay-a strong sign the investment community is skeptical the original deal will close.

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