March 25, 2010
Looking for a White Knight
The once-venerated fashion label, Emanuel Ungaro, is looking for a white knight to buy the company. According to both the business press and the NY Post, Lindsay Lohan, Ungaro’s short-lived “artistic adviser” “may have been the straw that broke the fashion house's bank.” It appears that Ungaro, like many other companies, has took on an enormous amount of debt and now is courting suitors and cutting costs to pay back this debt. Ungaro’s business problems and its lack of fashion vision, may mean that no white knight will be willing to swoop in and rescue the company.
Ungaro's problems present just one example of the enormous role that existing debt plays in M&A deals. In another high profile debt-driven deal, the WSJ reported yesterdaythat the debtors of MGM, the iconic Hollywood studio, have thrown a wrench in the company’s plan to sell itself as part of efforts to pay off the billions of debt that it took on in connection with its 2004 leveraged buyout. Given the private equity LBO boom of the 2004-2007 period, we are definitely not going to see the last of companies suffering under a heavy debt load and the influence of existing debt holders in acquisition transactions. Companies may find a white knight, but that knight may need to court not just equity holders, but also existing debt holders.
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