School Specialty Says Buyout Delayed; Shares Plunge

School Specialty Inc., a distributor of school supplies being acquired in a leveraged buyout, said the takeover won't be completed as scheduled after a $350 million junk-bond sale was canceled. The shares fell 17 percent.

Bank of America Corp., JPMorgan Chase & Co. and Deutsche Bank AG, which were managing the debt sale, canceled the bonds after the Greenville, Wisconsin-based company cut its 2006 earnings forecast. School Specialty cited ``disappointing results'' and ``concerns about near-term financial and operating performance'' in a press release distributed by PR Newswire.

Bain Capital LLC and Thomas H. Lee Partners LP agreed to acquire the Greenville, Wisconsin-based company in May for $1.12 billion. The deal was supposed to close about Sept. 30. School Specialty in June forecast 2006 earnings of $2.35 to $2.60 a share. Today, it said earnings won't exceed $2.31, and Standard & Poor's said it may cut the company's credit rating.

``That's material information that would probably change the pricing'' of the bonds, said Raymond Kennedy, who oversees of $32 billion of junk bonds at Pacific Investment Management Co. in Newport Beach, California. ``It raised operational questions. They did the right thing because they came out with surprising numbers.''

Bain and Lee agreed to pay $49 a share for School Specialty, which sells furniture, books and art supplies to schools. The shares fell $8.42 to $40.36 at 4 p.m. New York time in Nasdaq Stock Market trading today. It was the biggest percentage drop since they fell 21 percent in November 2001, according to Bloomberg data.

Credit Ratings

S&P, which rated the School Specialty notes CCC+, said it may lower the credit ratings because of the ``sharply lowered earnings guidance.'' Moody's Investors Service rated the offering B3. Both ratings are in the lower half of non- investment-grade.

A pulled bond sale ``is not a common occurrence, but it's not a one-in-a-thousand event either,'' said Kennedy, who didn't buy the School Specialty notes. ``It probably happens about three or four times a year''

School Specialty priced $350 million of 10 percent eight- year notes on Sept. 23, and the offering wasn't scheduled to close until Oct. 5. They were issued to yield 5.81 percentage points more than comparable 10-year U.S. Treasury debt. The sale was cut from the $650 million amount announced in early September.

School Specialty Chief Executive David Vander Zanden didn't return a call seeking comment. Bank of America spokeswoman Louise Hennessy, Alex Stanton, spokesman for Bain, and Gregory Miller, spokesman for Lee, each declined comment.

``It sounds like it's going to be a royal mess,'' said Matt Wilcox, a junk-bond analyst at KDP Investment Advisors, in an interview from his Montpelier, Vermont. The reduced earnings forecast ``would hurt their free cash flow numbers.''

Select Medical Corp. and Vitamin Shoppe Industries also pulled junk-bond offerings in the past month, according to Bloomberg data and S&P Leveraged Commentary & Data.

The company's percent notes due in 2023, which are convertible into stock, fell 12 cents on the dollar from 121 cents to 109 cents on Trace, the bond price reporting service of NASD.

To contact the reporter on this story: David Russell in New York drussell4@bloomberg.net and Margot Habiby in Dallas at mhabiby@bloomberg.net.

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net.

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