Pvt. equity firm buys Deb Shops for $395M

Private equity group Lee Equity Partners L.L.C. is purchasing junior-girl fashion retailer Deb Shops Inc., a Philadelphia company founded as a womens' hoisery store, for $395 million, the company said today.

The $27.25-per-share deal needs shareholder approval and was a small premium over Thursday's closing price of $26.68.

The company's share price fell 17 cents today during regular trading, ending at $26.51, but then soared in after-hours trading to almost $27.

Marvin Rounick, president and chief executive officer, said in an interview, "It's time. I'm 67 years old. . . . I think this is a great opportunity for the people here." Commenting on the offering, Rounick said, "If we thought it was a lousy deal we wouldn't take it."

Added chief financial officer Barry J. Susson: "This is not an exit because the building is on fire."

Revenue at Debs Shops, with 337 stores in 42 states, was flat in its latest fiscal year at about $325 million. Net income for the fiscal year ended Jan. 31 fell to $21.4 million from $25.3 million in the prior year.

Well-known investor Thomas H. Lee runs the New York firm doing the buyout and "has the money and the track record" to make Deb Shops a success, Rounick said. In a statement, Lee said, "Given our industry expertise in retail and our focus on post-investment operating improvement, we are excited to collaborate with Deb Shops existing management to refresh the store operational model and to execute a new store growth plan."

Lee has a reputation of treating acquired companies kindly rather than eliminating employees and sacking management. Deb Shops 200-employee headquarters and warehouse is located near the Northeast Philadelphia Airport.

Deb Shops board approved the proposed deal but stockholders have to vote on it, the company said. Lee Equity secured commitments from Rounick, executive vice president Warren Weiner and others representing 64 percent of the common stock for the deal, the company said in a statement.

Rounick holds 3.9 million common shares, worth $106 million. Weiner owns 2.75 million shares, worth $75 million. They are the two biggest individual shareholders, according to regulatory filings.

Lee Equity also has the consent of the preferred shares held by Rounick and Weiner, Deb Shops said.

Lehman Bros. acted as financial advisor for the company and Philadelphia firm Morgan, Lewis & Bockius L.L.P. was its legal counsel. Bear Sterns advised Lee Equity and Barclays Capital will do financing. Weil Gotshal & Manges L.L.P. counseled Lee Equity.

Allen Questrom, a long-time retailing executive and senior advisor to Lee Equity, will work with the Deb Shops management.

Deb Shops was founded by the fathers of Rounick and Weiner, Philip Rounick and Aaron Weiner, on 52nd Street in West Philadelphia in the early 1930s. The company added merchandise and branch locations in the 1940s, '50s and '60s.

In the 1970s, the company opened its first mall store in Easton and focused on junior-girls merchanise. "That's when growth took off," Marvin Rounick said. In the 1980s, the company went public and in the 1990s it added pluz-size clothing.