Friday, February 08, 2008

Can The Children's Place and Former CEO Dabah Play Nice?

Shares of The Children's Place Retail Stores Inc. (PLCE-$21.28) surged 19.69%, or $3.50 a share, in trading Thursday after the Company said it was approached by its former Chief Executive Officer, Ezra Dabah, regarding a potential $578 million buyout of the children's apparel retailer.

According to a
regulatory filing, Ezra Dabah, who beneficially owns 17.2% of the common stock, requested that the Board authorize Mr. Dadah to enter into agreements with Golden Gate Private Equity Inc. for the purpose of making a proposal to acquire the company's outstanding shares at $24.00 a share in cash.

In September 2007, the Board of Children’s Place forced Dabah to resign for violating internal stock trading policies. According to the Company, Dabah's errors involved (i) pledging company shares (on two occasions) to a margin account during a blackout period without required prior approval and (ii) failing to properly report to the Company an increase in the number of shares owned by his wife, Renee Dabah, pertaining to a trust distribution.

Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light.

Though Dabah skipped out willingly, he expresses his ire with the Company's
portrayal of his departure. In a two-page letter to the Board's chairman, Sally Frame Kasaks, dated October 11, 2007, Dabah charged that his resignation was "solely attributable to a power play by certain members of the board" and upbraided the company for making remarks "that disparaged [his] good name and reputation."

Though wise men at their end know dark is right,
Because their words had forked no lightning they
Do not go gentle into that good night.

Will Dabah and Children’s Place make nice on the playground and come to an agreement?

Good men, the last wave by, crying how bright
Their frail deeds might have danced in a green bay,
Rage, rage against the dying of the light.

Section 9.03 of Dabah’s 'Restated Employment Agreement,' dated May 12, 2006, contains a mutual Non-Disparagement clause, precluding both parties from making "any public statement disparaging the other in its or his business interests and affairs."

Wild men who caught and sang the sun in flight,
And learn, too late, they grieved it on its way,
Do not go gentle into that good night.

History suggests a blatant disregard—if not a breach—of this particular provision by both the Board and Messer. Dabah.

Grave men, near death, who see with blinding sight
Blind eyes could blaze like meteors and be gay,
Rage, rage against the dying of the light.

Dabah can rage, rage against the dying of the light, but it looks doubtful that the Board will accede to his overture.

The share price of Childern’s Place closed in trading today at a discount of 11.3% percent to Dabah’s offer price, suggesting that investors do not believe that the Board will grant the requisite permission needed to bypass Delaware shareholder acquisition law that would otherwise prohibit Golden Gate’s participation in any offer by Dabah.

And you, my father, there on the sad height,
Curse, bless me now with your fierce tears, I pray.
Do not go gentle into that good night.
Rage, rage against the dying of the light.
~ Welsh poet Dylan Thomas (1914 – 1953)

Given that shoppers are cutting back on discretionary spending, we are not optimistic that a higher bid will emerge. The Board previously put the Company up for sale in October 2007, hiring Lehman Brothers to act as its financial advisor—to undertake "a review of strategic alternatives to improve operations and enhance shareholder value."

Management turmoil and a string of lower-than-expected profits are slamming the share price, with the stock down almost 63 percent from its 52-week intra-day high of $58.89 a share, touched on February 22, 2007.

The Company did post today, however, a same-store sales rise of 6 percent in January, driven by increased promotions (which will pressure gross margins). Consensus estimates called for a 2.2% increase year-over-year.

In our view, a failure by management to boost sales growth more than 7% -to- 8% per annum and/or to improve operating margins above trailing-twelve month value of 2.41% bumps the intrinsic value of The Children’s Place up against a ceiling of $24.00 a share.

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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