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Hot Topic, Inc. (HOTT), Aeropostale, Inc. (ARO): More Buyouts in the Teen Clothing Space?

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In early March, the already volatile world of youth fashion was rocked by the announcement that City of Industry, Calif.-based teenage clothing retailer Hot Topic, Inc. (NASDAQ:HOTT) accepted an all-cash buyout offer from privately held asset management firm Sycamore Partners.

Hot Topic (HOTT), Insider TradingThe $600 million deal will provide a significant return for long-term Hot Topic shareholders, and result in Hot Topic’s demise as a publicly-traded company. It will also represent the culmination of years of uneven share-price performance and tumultuous boardroom dealings at the struggling clothing retailer.

Despite the unified front that the company’s management team has presented, the deal remains subject to legal scrutiny from several shareholder groups who are holding out for a better agreement. Assuming that none of these investigations results in a shareholder lawsuit or otherwise scuttles the deal, it could close by the end of the third quarter of 2013.

About Hot Topic and Sycamore Partners

Hot Topic is a clothing and novelty retailer that sells a variety of clothing products and fashion accessories for teenagers and young adults. The company operates about 600 mall-based “Hot Topic” stores in North America, and around 150 “Torrid” stores in the United States. Whereas the “Hot Topic” concept appeals to a wide range of adolescents, “Torrid” is marketed specifically to plus-size females under the age of 21. Hot Topic, Inc. (NASDAQ:HOTT) also operates a handful of “Blackheart” stores that sell jewelery, tattoo accessories, and other novelty items.

The company employs about 2,200 full-time workers and earned $16.3 million on $718.7 million in 2012 gross revenues.

New York-based Sycamore Partners is a boutique private equity firm that specializes in wealth management, small-scale leveraged buyouts and corporate guidance. The company has worked with fashion-forward clothing retailers like Talbots and Mast Global Fashions, as well as smaller finance firms. Although it does not issue detailed financial statements to the public, Sycamore has at least $1 billion under direct management, and it employs several dozen employees.

How the Deal Is Structured

This relatively straightforward deal will be structured as a “one-step” all-cash buyout. Under the terms of the agreement, Sycamore will issue cash payments of exactly $14 per share to each Hot Topic shareholder as of a yet-to-be-determined record date.

Relative to Hot Topic’s pre-announcement closing price of $10.75 per share, this represents a premium of about 30.2%. Relative to the company’s most recent closing price of $13.85 per share, it offers a premium of 1.1%.

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