Sequential Brands Group Inc.(Nasdaq: SQBG) is teaming up with Global Brands Group Holding Ltd. to buy struggling high-end denim purveyor Joe's Jeans(Nasdaq: JOEZ) for a mere $67 million. Not included in the deal in Joe's subsidiary Hudson, which will merge with private equity-backed fashion brand Robert Graham in a separate $13 million transaction. Joe's paid $98 million for Hudson in 2013, but was never able to fully integrate the brand.
Joe's makes denim, apparel and accessories sold in department stores and company-run boutiques. Hudson also specializes in jeans and other clothes. Joe's did not return a call for comment.
As Mergers & Acquisitions previously reported, Joe's had beenexploring a sale processas part of a larger restructuring plan. The company defaulted on two loans back in November.
Joe's, headquartered in Commerce, California, has been on Mergers & Acquisitions'Distressed Company Watch Listfor months, due in part to the stress put on the brand following the 2013 acquisition of Hudson for $98 million. Joe's never fully integrated Hudson, and after financial problems arose, so did the ire of Hudson's founder, Peter Kim, who resigned from Joe's board of directors (but stayed on as Hudson's CEO) amid concerns that the company wasn't taking enough action to regain financial stability. Kim, in letters to the company's board, "stated that he did not believe that others were acting with the necessary urgency given the company's financial situation," according to a filing with the U.S. Securities and Exchange Commission.
Before Joe's executed the Hudson deal, it was able to operate mostly from cash on hand and a factoring agreement. But afterwards, the business relied increasingly on the loans it eventually defaulted on, SEC filings show.
The retailer's auditor raised substantial doubt about the company's ability to continue as a going concern, or without the threat of liquidation – the warning that landed them on the Distressed Company Watch List.
Joe's will use proceeds for the sale to pay its lenders back.
After the Joe's deal closes, which is expected to happen before Sept. 30, the company will be renamed Differential Brands Group Inc. and remain listed on the Nasdaq exchange. The business will be headed by Michael Buckley, the current CEO of Robert Graham who previously worked at fashion lines Diesel and Ben Sherman.
Both Sequential and Robert Graham are backed by consumer-focused private equity firm Tengram Capital Partners. The Westport, Connecticut-based firm also owns stakes in DevaCurl, Laura Geller cosmetics and Nest Fragrances.
Robert Graham, headquartered in New York, designs men's and women's apparel and accessories. Sequential Brands Group, also based in New York in, owns several apparel brands, including Ellen Tracy, Linens 'N Things, Jessica Simpson and Heelys.
After the deal closes, Robert Graham equity holders will own 47.3 percent of the common stock, Tengram will own 23.9 percent in preferred stock and convertible noteholders will own 14 percent. Tengram plans to purchase $50 million in series A convertible preferred stock to recapitalize the business. Fireman Capital Partners, an earlier investor in Hudson, will hold a stake in the merged Robert Graham/Hudson business.
Piper Jaffray (NYSE: PJC) advised Tengram and Robert Graham, while Skadden Arps Slate Meagher & Flom LLP provided legal advise. Akin Gump Strauss Hauer & Feld LLP and Carl Marks Securities LLC advised Joe's. Carl Marks declined to comment for this story.
B. Riley & Co. LLC financial adviser to Kim and Fireman Capital, and Sullivan & Cromwell LLP provided legal advice to Kim. McDermott Will & Emery LLC was Fireman's legal counsel.