Equity firm buying Deb Shops in $395 million deal

Private-equity group Lee Equity Partners L.L.C. is purchasing junior-girl fashion retailer Deb Shops Inc., a Philadelphia company founded as a women's hosiery store, for $395 million, the company said yesterday.

The $27.25-per-share deal requires shareholder approval and represents a small premium over Thursday's closing price of $26.68.

Deb Shops' share price fell 17 cents yesterday during regular trading, closing at $26.51, but then rose in after-hours trading to almost $27 at one point.

Marvin Rounick, Deb Shops' president and chief executive officer, said in an interview: "It's time. I'm 67 years old. . . . I think this is a great opportunity for the people here." Commenting on the offering, Rounick said: "If we thought it was a lousy deal, we wouldn't take it."

Chief financial officer Barry J. Susson added: "This is not an exit because the building is on fire."

Revenue at Deb Shops, with 337 stores in 42 states, was flat in its latest fiscal year at about $325 million. Net income for the fiscal year ended Jan. 31 fell to $21.4 million from $25.3 million in the preceding year.

Well-known investor Thomas H. Lee runs the New York firm doing the buyout, and "has the money and the track record" to make Deb Shops a success, Rounick said.

In a statement, Lee said: "Given our industry expertise in retail and our focus on post-investment operating improvement, we are excited to collaborate with Deb Shops' existing management to refresh the store operational model and to execute a new store growth plan."

Lee has a reputation of treating acquired companies kindly rather than eliminating employees and sacking management. Deb Shops' 200-employee headquarters and warehouse is near the Northeast Philadelphia Airport.

Deb Shops' board approved the proposed deal, but stockholders must vote on it, the company said. Lee Equity secured commitments of support for the deal from Rounick, executive vice president Warren Weiner, and others representing 64 percent of the common stock, the company said in a statement.

Rounick holds 3.9 million common shares, worth $106 million. Weiner owns 2.75 million shares, worth $75 million. They are the two biggest individual shareholders, according to regulatory filings.

Lee Equity also has the consent of the preferred shares held by Rounick and Weiner, Deb Shops said.

Lehman Bros. Inc. acted as financial adviser for the company, and the Philadelphia law firm of Morgan, Lewis & Bockius L.L.P. was its legal counsel. Bear, Stearns & Co. Inc. advised Lee Equity, and Barclays Capital will do financing. Weil Gotshal & Manges L.L.P. counseled Lee Equity.

Allen Questrom, a longtime retailing executive and senior adviser to Lee Equity, will work with the Deb Shops management.

Deb Shops was founded by the fathers of Rounick and Weiner, Philip Rounick and Aaron Weiner, on 52d Street in West Philadelphia during the early 1930s. The company added merchandise and branch locations in the 1940s, '50s and '60s.

In the 1970s, the company opened its first mall store in Easton, and focused on junior-girl merchandise. "That's when growth took off," Marvin Rounick said. The company went public in the 1980s, and added pluz-size clothing in the 1990s.

Founded: 1932, as Joy Hosiery.

Headquarters: Philadelphia.

Business: Retailer of clothing, shoes and accessories for young women.

Stores: 337 in 42 states under the DEB and Tops 'n Bottoms names.

2007 revenue*: $324.7 million, unchanged from 2006.

2007 profit*: $21.4 million, down 15 percent from 2006.

*Fiscal year ended in January.

SOURCES: Deb Shops, Bloomberg News

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