FAO Finds Buyer for 2 Stores, Direct Operations

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The troubled but legendary FAO Schwarz name survived the long Christmas weekend.

Bankrupt parent company FAO Inc., King of Prussia, PA, announced Dec. 26 the sale of certain FAO Schwarz assets to VGACS Acquisition Inc., a subsidiary of D.E. Shaw Laminar Portfolios LLC, for $20 million, subject to certain adjustments.

The sale included the Fifth Avenue flagship in New York, a store in Las Vegas, its Internet and catalog operations and intellectual property rights. A motion with the bankruptcy court will be filed to obtain approval for procedures that would allow the agreement to be approved, or to have overbids accepted by about Jan. 22.

Don Libey, president of Libey-Concordia, a Philadelphia-based advisory and investment banking firm that serves the catalog industry, said FAO's dominant retail image leaves D.E. Shaw with a challenge if it intends to grow the brand's Internet and catalog operations.

"FAO Schwarz is essentially a retail business, so if you're going to make a conversion to a catalog and Internet business, it will be a major mind shift for the consumer," he said. "The impression is one of a retail store presence, not a catalog or Internet impression. Someone taking it over will have to position it in a totally different channel."

FAO Inc. will sell the remaining inventory in the stores. The newly created company then plans to close both stores for remodeling. Reopenings are expected to occur before the summer.

FAO Inc. also said Dec. 24 that it received what it described as emergency approval for the sale of 34 Right Start stores to an affiliate of Hancock Park Associates, Los Angeles. The Right Start includes 38 stores. It did not specify why the "emergency approval" was granted or why 34 stores were being sold.

A U.S. Bankruptcy Court judge for the Western District of Massachusetts in Worcester had agreed with mall owners Dec. 23 who said Right Start's would-be purchaser lacked sufficient financing. FAO Inc. had received a $6.25 million bid from Hancock Park, a private equity firm. After the hearing, judge Joel B. Rosenthal had been dissatisfied with the finances of Right Start Acquisition Corp., which was created by Hancock Park.

"There is virtually no evidence in this record that they could make it to the fourth quarter of next year," Rosenthal said, according to The Telegram & Gazette of Worcester.

But Bloomberg News reported Dec. 25 that leases on more than 30 Right Start stores will not expire for two years and that Hancock previously hadn't agreed to put more money into the entity it created to acquire Right Start, or guarantee that lease payments would be met, according to Jeffrey Meyers, a lawyer representing seven properties where Right Start stores are located.

Those visiting www.rightstart.com Dec. 29 saw the following: "We're Making Some Improvements! RightStart.com is temporarily unable to take orders. Please visit your local The Right Start store for all your shopping needs. January 11, 2004 is the last day to redeem gift cards. Please visit your local store to redeem gift cards."

The company said nothing regarding the transfer of liabilities. It also reaffirmed its previously stated belief that it does not expect any recovery will be available for its common stockholders regarding its bankruptcy.


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