Restoration Hardware Sold!

Restoration Hardware, Inc. yesterday announced that it had agreed to be acquired by an affiliate of Catterton Partners.  Gary Friedman, Restoration Hardware’s CEO, is a party to the transaction, and several institutional stockholders of Restoration Hardware have agreed to invest in the transaction. The total equity value of the deal is approximately $267 million.

There are a number of interesting things about this deal: 

1. In the press release was the following disclosure: "The transaction is not subject to any financing condition . . . ."  When was the last time you saw that in a private equity deal?  Not since before those troubling August times.  The reason why there is no financing condition here is that the transaction appears to be all equity financed with perhaps some post-transaction debt financing coming from Restoration's current credit facility.  Per Section 4.5 of the merger agreement, Catterton represents:
   • "Assuming the funding of the Financing in accordance with the Equity Commitments . . . . the proceeds from such Financing constitute all of the financing required for the consummation of the transactions contemplated by this Agreement and, together with the Company’s current $190 million credit facility with Bank of America, N.A. (the Parent and the Company have received from Bank of America, N.A. a waiver letter pursuant to which Bank of America, N.A. has agreed to maintain in place the Company’s credit facility following the Merger, subject only to certain conditions as set forth in such waiver letter), are sufficient for the satisfaction of all of Parent’s and Merger Sub’s financial obligations under this Agreement . . . .
2. There is a reverse termination fee payable by Catterton on the deal of $10,680,000.  However, this is only payable if the acquirer breaches the agreement by, for example, refusing to close, and Restoration sues.  There is otherwise a bar on specific performance and a cap on damages for the buyer in Section 8.4(c) of the merger agreement.  This cap is set at the amount of Catterton's equity commitment.  So, this structure is like the other recent post-August M&A deals (3Com, etc.) in that it sets up a two-tiered buyer damages regime.  First, is a lower fee payable if the target terminates upon buyer breach.  And another, higher fee is available if the target does not terminate in such a case but sues.  Here, it is not as egregious as the other deals though because the second, higher damages limit is the amount of the equity commitment.  This amount is not disclosed, but I presume it is much higher than the second fee in other deals and likely the full deal amount. 
3. For a management participating LBO, this deal is relatively light on investor protection.  The agreement provides for a 35 day go-shop, which, in these circumstances, with such significant management participation is meaningless -- no third party bidder will likely bid in this situation (though it is ameliorated by the high premium of 150%).  The go-shop break fee is $6,675,000 while the regular break fee for a post-go-shop Restoration third party deal is $10,680,000.  Finally, the deal has a provision that if the shareholders vote no Catterton is paid $2,670,000.  This last fact is ameliorated by the high vote required here which is:

(i) the approval of holders of two-thirds of the outstanding shares of Restoration Hardware common stock pursuant to the certificate of incorporation of Restoration Hardware, [and] (ii) the approval of holders of a majority of the shares voting at the special meeting that are held by stockholders not participating in the transaction . . . .

Ultimately, the deal is interesting because it breaks with the reverse termination fee practices of the other private equity deals announced post-August by requiring the acquirer to pay a significantly higher fee if they refuse to close and the target does not terminate the deal.  This is a model more akin to what happened in American Home Lenders/Lone Star where the damages remedy was specific performance or payment of the entire merger consideration.  That deal was completed albeit at a lower price.  This in contrast to the many deals (Acxiom, Harman, SLM, etc.) where the buyer was able to effectively walk due to a significantly lower damages overhang.  M&A lawyers would do well to tell their clients of the difference.