Business Context and Reporting Period
This Form 8-K, dated February 8, 2011, reports a material definitive agreement entered into by DSW Inc. ("DSW") and Retail Ventures, Inc. ("Retail Ventures"). The filing announces an Agreement and Plan of Merger under which Retail Ventures will merge with and into DSW MS LLC, a wholly-owned subsidiary of DSW. Retail Ventures currently controls a majority of the voting power of DSW by owning all outstanding DSW Class B common shares.
Key Financial Metrics and Transaction Terms
The filing details the financial structure of the proposed merger rather than historical operating results for a specific period.
- Exchange Ratio: Each outstanding Retail Ventures common share will convert into the right to receive 0.435 DSW Class A common shares (or Class B shares if elected).
- Compensatory Awards: Retail Ventures stock options, stock appreciation rights, and restricted stock will convert to DSW awards on terms substantially identical to the pre-merger terms, adjusted by the 0.435 exchange ratio.
- Tax Status: The transaction is expected to qualify as a tax-free reorganization for U.S. federal income tax purposes, with gain or loss recognized only on cash received in lieu of fractional shares.
- Debt Assumption: Merger LLC will assume Retail Ventures' obligations regarding 6.625% mandatorily exchangeable notes due September 15, 2011 (Premium Income Exchangeable Securities or PIES).
- Warrants: Merger LLC will assume certain warrants issued by Retail Ventures to purchase DSW Class A common shares.
- Termination Fee: The agreement allows for termination under certain circumstances, including the receipt of a superior proposal, subject to a payment of transaction expenses not to exceed $10 million.
The filing text does not provide specific values for revenue, profit, cash flow, margins, or liquidity for either company.
Material Changes and Conditions
The primary material change is the proposed consolidation of DSW and Retail Ventures. The completion of the Merger is conditioned upon:
- Adoption of the Merger Agreement by holders of a majority of outstanding DSW Class A and Class B shares (voting together), unaffiliated DSW Class A shares, and Retail Ventures common shares.
- Adoption of amended and restated articles of incorporation for DSW to allow Class B shares to convert to Class A shares.
- Approval of the issuance of DSW shares to Retail Ventures shareholders.
- Customary representations, warranties, and covenants.
Upon closing, DSW's board of directors will increase from 11 to 12 members, with one Retail Ventures board member appointed to the DSW board.
Guidance, Outlook, and Risks
Management expects the transaction to generate synergies, costs, and efficiencies, though specific financial projections are not detailed in this filing. The companies plan to discuss the merger during a conference call with analysts and investors on February 9, 2011.
Risks and Contingencies:
- Transaction Failure: Risks include failure to receive required shareholder approvals, governmental action blocking the transaction, or failure to satisfy closing conditions.
- Forward-Looking Statements: Actual results may differ materially from expectations due to uncertainties outside the companies' control.
- Related Party Transactions: The filing notes numerous material relationships between DSW and Retail Ventures, including leases, merchandise transactions, and shared services.
Investor Verification Checklist
- Verify the final approval status of the Merger Agreement by shareholders of both DSW and Retail Ventures.
- Review the upcoming Joint Proxy Statement/Prospectus (Form S-4) for detailed financial data and risk factors not included in this 8-K.
- Confirm the treatment of fractional shares and the specific tax implications for individual shareholders.
- Monitor the status of the 6.625% PIES notes and the assumption of these obligations by the surviving entity.
- Check for any superior proposals that could trigger the termination of the Merger Agreement and the associated $10 million expense cap.