Axios Pro Exclusive Content

Sycamore lines up equity to finance Chico's acquisition

A storefront for apparel intimates brand Soma.

Chico's includes the banner, Soma. Photo by Smith Collection/Gado/Getty Images

Private equity firm Sycamore has lined up all equity to finance its acquisition of apparel retailer Chico's FAS for $1 billion, per SEC filings and confirmed by a source close to the situation.

Why it matters: An all-equity deal takes the "L" out of LBO and the transaction is one of the rare take-privates of a U.S. retailer in recent years, particularly in apparel.

Of note: Sycamore declined to comment on whether it will ultimately utilize debt and if it does, how much the amount would be and what the timing might look like.

Details: The transaction does not hinge on a financing condition and there is a 30-day go-shop period in which Chico's financial adviser, investment bank Solomon Partners, can actively solicit other proposals.

What we're watching: It is possible that Sycamore lines up debt financing immediately once the deal closes, which could be done quickly, says an industry banker.

  • Another option is for the PE firm to wait until the debt markets fully reopen and financing becomes more affordable.
  • It could then claw back a large chunk of the equity it is sinking into the deal via a dividend recap.
  • Regardless, Sycamore could split up the business and monetize the retailer's parts, which includes the banners Chico's, White House Black Market and Soma.
  • Specifically, it could spin off Soma, which is seen as the most lucrative part of the business, the industry banker says, and finance that transaction with debt.

Catch up fast: Sycamore has been one of the most aggressive users of debt and dividend recaps to back retail buyouts over the past decade.

  • At one point, its deals were financed with between 20% and 30% equity and between 70% and 80% debt.

Between the lines: Obtaining syndicated debt in the current financing environment is no easy feat.

  • PE firms have resorted to direct lending (though typically more expensive) and for franchisors, whole business securitization.

The intrigue: Activist investor Barington Capital Management, which had been pushing for change for several years, did not report a stake in Chico's, per its most recent 13F filing.

  • In 2021, Barington noted intimate clothing brand Soma alone could be worth more than the entire company.

Be smart: PE has a mixed track record when it comes to successful retail LBOs over the past decade.

  • Two of the most recent retail LBOs are already experiencing financial difficulties: Hellman & Friedman-backed At Home Group defaulted on its debt in May, while Moody's downgraded Apollo-backed Michaels to a credit rating of B3.
  • Firms often target unhealthy banners that can be acquired for a relative bargain.
  • Debt is then ladened onto the balance sheet, which siphons away free cash flow that could be saved for a rainy day or reinvested.
  • Disruptive startups or technologies, or unforeseen seismic events like a financial crisis or pandemic, can create the perfect storm for bankruptcy.
  • Then add to all that the fact that the cost of servicing debt has at least doubled over the past couple of years.
Go deeper