LNT Sale a Work in Progress

Clifton, N.J. —Linens 'n Things faces tough requirements to unleash financing for its $1.3 billion acquisition by an investment group lead by Apollo Management. It will have to hit an EBITDA target above any it has achieved in the past few years — and to do so will have to add $85.5 million to the $54.5 million it logged in the first three quarters.

Debt financing providers UBS Securities and Bear, Stearns & Co. have agreed to go forward with the transaction if LNT's earnings before interest, taxes, depreciation and amortization (EBITDA) hit no less than $140 million for the current fiscal year. EBITDA for the first three quarters of the year was down 38.5 percent on a year-over-year basis, according to a report by Deutsche Bank Securities.

The acquisition would be made by a newly formed company controlled by Apollo, together with co-investors, including NRDC Real Estates Advisors I LLC. The buyers are offering $28 per share. At mid-day on Friday, Nov. 10, LNT shares were trading at $26.60, up 3 percent from their mid-day trading level following the deal's Nov. 8 announcement.

In a second provision, LNT also has to post fourth-quarter comps no worse than a 6 percent decline. On the up side, the comp requirement falls into the meaty holiday period that is traditionally LNT's best. But November and December comps will have to overcome an 8.4 percent comp decline in October, the first month of the quarter.

“There are many variables which can be expected to impact satisfaction of these financial and other conditions to the debt financing, and the company cannot predict these results with certainty or provide assurance that these conditions will be achieved,” LNT said in a statement.

The company did not specify what other conditions have been set to unlock the financing.

Wall Street analysts were largely skeptical last week.

Wedbush Morgan Securities maintained its “sell” rating on the stock.

“We have modeled a -6 percent comp for the quarter, which we estimate will provide an EBITA (sic) of $132.1 million, below the $140 million hurdle rate for approval of the debt financing.”

Banc of America Securities estimated full-year EBITDA at $128 million, also short of the goal. And Deutsche Bank predicted in a research note that the $140 million figure “may be tough to achieve.”

However, if LNT fails to meet the targets the possibility remains that terms of the deal may simply be renegotiated.

In a letter to associates, LNT said: “Apollo is seen as a strong partner in this transaction for several reasons. First and foremost, Apollo believes in our company, its concept and the opportunity for future growth. That belief in our company is most visible through their willingness to finance almost half of the purchase price with their own equity capital.”

LNT said in a filing with the Securities and Exchange Commission that it expects the deal to close in the first or second quarter of 2006 and that it will operate as a privately held concern thereafter. The company also stated there are no plans to close stores ahead of the transaction or to alter the company's management structure following it.

Apollo has invested in other retail sectors. The 15-year-old private investment firm has managed more than $12 billion in the United States and abroad, including Ralphs Grocery Company, Dominick's Supermarkets and Zale Corporation.

NRDC Real Estates Advisors I is a partnership between the principals of National Realty & Development Corp. and principals of Apollo Real Estate Advisors.