Battle for Perry Ellis Hinges on Fiduciary Duty to Shareholders

The responsibility to shareholders involves a common sense approach to balancing price and the ability to close the deal.

The two key words that likely will determine the outcome in the battle for Perry Ellis International Inc. are dollars — share price — and sense, the latter being common sense in evaluating all factors to ensure that the fiduciary duty to shareholders is being met.

While the per-share offering price is always of utmost importance to shareholders, it sometimes isn't the overriding concern for corporate board members when evaluating a mergers and acquisitions deal. The Perry Ellis board's special committee, in fulfilling its fiduciary duty to shareholders, also needs to look at other factors, the most important being a bidder's ability to close on the transaction. And that's where sometimes the answer isn't so clear.

The battle is on over ownership and control of Perry Ellis International. The company's special committee has already determined and reiterated its commitment to a $437 million takeover bid from company founder George Feldenkreis, at $27.50 a share, versus a competing $444 million offer from Randa Accessories at $28 a share. But Randa on Monday claimed foul play, given that the special committee won't open discussions with it even when its offer is 50 cents a share higher than the one that's been accepted.

Richard Kestenbaum, partner at boutique investment bank Triangle Capital LLC, said, “It's very hard for management to recommend to shareholders a lower value than what's available in the public market, in this case another bidder. From the shareholders' interests, that higher offer represents the potential value of their stock.”

The banker said while price is often the most important criteria, concern over the ability to close on the deal runs a very close second, if not one that is on par with price in certain circumstances.

“If a deal can't close, it doesn't matter what the price is, but it is never that crystal cut,” Kestenbaum said.

In the case of Randa's bid, the company said Monday that contrary to the

Perry Ellis special committee's inaccurate claim regarding its financing ability, it has obtained “executed debt commitment papers from world-class financial institutions” that are “more than sufficient to consummate our proposed transaction.”

Perry Ellis was in contact with Randa executives when it was in talks with company founder George Feldenkreis earlier this year. Speculation was that talks stalled over its then-proposed $27.75-a-share offer because it didn't have financing in place. Since then, Randa is said to have secured an ABL bridge loan and a term loan via a financing commitment from the financial services arm of KKR. It also has cash on hand. A spokeswoman for KKR declined comment, while executives at Randa did not return a call for comment.

Although financing is in place, it's still a common-sense evaluation of the likelihood of Randa closing on its proposed deal that's likely to be the key to future control of the company.

Kestenbaum said, “The special committee has to act in the best interest of shareholders. That is the only master that they can answer to. As long as they respond to that question faithfully, they will always come up with the right solution.” He added that if the “committee doesn't believe that a deal will close, then [the deal's] not worth much to shareholders.”

Randa sent its latest missive in the form of a letter to the special committee on Monday morning. A Perry Ellis spokesman referred queries for comment back to the special committee's statement from last week. That effectively reiterated the committee's rejection of the offer as conditional and nonbinding, as well as the focus on other terms that could be deemed as “inferior,” which include risks to closing.

Randa's letter on Monday addressed the issue of “conditionality,” noting that it “relates solely to our request for access to certain key business contacts of the company.” The letter went on to note: “If the special committee chooses to assist us with this issue, we are confident that it would be resolved expeditiously, and that we could reach a mutually acceptable definitive merger agreement within 24 hours following the resolution of that issue.”

One stumbling block often rumbled about in the markets has been whether inbound licensed brands would continue with their existing Perry Ellis agreements. Licensing agreements typically have a change in control provision that licensers can use to opt out of the agreement.

Randa has eight long-standing agreements with brands that each span at least 15 years, with the three longest being Dickies at 41 years, Levi's at 25 and Dockers at 31. But the caveat here is that these agreements are primarily for accessories goods, not apparel.

In contrast, Perry Ellis is an apparel manufacturer. And Randa might have a high hurdle to convince brands in the inbound licensing program that it has the ability to produce apparel.

The next step in a bidding war typically would be an even higher offer from one of the bidders. There are no indications currently that either party would raise its offer. Randa would be competing with itself, and Feldenkreis already has a committed agreement in place with the company. And in the case of Perry Ellis, a higher price might not matter since the special committee already has determined that the better deal — and the one that can close — is the one it already has inked with Feldenkreis.