Hot Topic Inc. (HOTT), the operator of more than 800 stores selling clothing, accessories and music to teens, agreed to be bought by private-equity firm Sycamore Partners for about $600 million.
The deal was unanimously approved by Hot Topic’s board and will require shareholder and regulatory approval, the companies said today in a statement. The offer of $14 a share is 30 percent higher than Hot Topic’s closing price yesterday.
Chief Executive Officer Lisa Harper, who took over the post two years ago after serving on the board since 2008, helped the operator of the Hot Topic, Torrid and Blackheart chains snap three years of sales declines. Hot Topic shares rose 46 percent last year as quarterly results beat analysts’ estimates for four straight quarters, according to data compiled by Bloomberg.
Harper is “the most crucial part of the acquisition,” Thomas Filandro, an analyst at Susquehanna Financial Group in New York, said today in a telephone interview. Filandro rates the shares positive, the equivalent of a buy.
Hot Topic rose 29 percent to $13.87 at the close in New York. The City of Industry, California-based company’s shares had gained 12 percent this year before today, compared with an 11 percent gain for the Standard & Poor’s 500 Retailing Index.
Harper, previously CEO of children’s clothing chain Gymboree Corp., has told investors she’s working to return Hot Topic to its “edgy, dark and sexy core.” The teen retailer, which features a goth sensibility, was a popular destination for fans of the Twilight book and film series featuring a teenage vampire. More recently, Harper has introduced a line of lingerie under the Blackheart brand.
She also has brought in new licenses including Batman and Hunger Games as well as more fashionable items such as polka-dot skinny jeans, Filandro said.
Harper is adding company-designed goods at Torrid, the stores catering to plus-size teens. The chain has no real competitors and offers Hot Topic’s best growth prospects, with the potential to double its percentage of the company’s sales to about half of its revenue, Filandro said.
Hot Topic is New York-based Sycamore’s fourth major investment, according to the firm’s website. Sycamore, which was started in 2011 by two executives from buyout firm Golden Gate Capital Corp., previously acquired stakes in Talbots Inc., Mast Global Fashions and consumer-retail lender Pathlight Capital. The firm has more than $1 billion in capital under management.
The transaction will heighten interest in potential retail buyouts, Filandro said.
Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, then sell them and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments.
Private-equity firms have “compelling reasons” to consider buyouts of Aeropostale Inc. (ARO) and Deckers Outdoor Corp. (DECK), the maker of UGG boots, because of their strong cash flow and potential margin improvements, Randal Konik, an analyst at Jefferies Group Inc. in New York, wrote in a note today.
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