A judge ruled Thursday that Genesco Inc. executives did not commit fraud during negotiations over a $1.5 billion acquisition and that fellow mall retailer The Finish Line Inc. must complete the purchase.
Nashville Chancellor Ellen Hobbs Lyle dismissed Finish Line’s claims that Genesco withheld key financial information that could have signaled worse-than-expected earnings after the deal closed in June.
Lyle said Indianapolis-based Finish Line and investment bank UBS AG were sophisticated enough to know what they were getting into with the $54.50-per-share purchase.
The buyout was conducted by “teams of lawyers, advisers and handlers being paid enormous sums to orchestrate the procedure for obtaining information” she wrote.
“This milieu is UBS’ home territory,” Lyle said.
UBS has filed a separate federal lawsuit in New York asking that its commitment to finance most of the deal be declared void because the combined entity would go bankrupt and default on its debt payments.
That case is still pending, but Lyle disagreed that the combined company would be doomed.
“The merger has a reasonable chance of succeeding,” she said.
UBS issued a statement saying it disagrees with the court and believes “there are material issues in our client’s and UBS’ favor in this matter.”
“We have consistently stood with our client in its position on this transaction and have been prepared to fund the transaction if the conditions of the financing are met.”
Nashville-based Genesco operates 2,000 retail stores in the United States and Canada under brand names like Journeys, Johnston & Murphy and Hat Shack, and is about twice the size of Finish Line.
Genesco rejected a slightly less generous buyout offer from Foot Locker Inc. in favor of the highly leveraged deal from Finish Line.
Lyle said making Finish Line simply pay damages to Genesco wouldn’t have been enough to repair the harm done by the attempt to get out of the deal.
“Genesco’s business has been irreparably harmed as a result of the stalled merger,” Lyle said in the ruling. “Genesco’s business is in a state of limbo.”
The negative effects of the court battle included dwindling stock prices, damaged vendor relationships and low employee morale, she said.
Genesco’s earnings swung to a loss in the second quarter and dropped 65 percent in the third quarter, but Lyle declined to find that Genesco had suffered a specific financial flaw that prevents it from making money.
“Genesco’s decline in performance in 2007 is do to general economic conditions such as higher gasoline, heating oil and food prices, housing and mortgage issues, and increased consumer debt loads,” she said.