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Blackstone Goes Big Into Crocs, Without a Buyout

Jon C. Ogg

Crocs Inc. (CROX) investors now have their answer as to whether the shoe company will be acquired. The answer is no, but with a serious twist. Investment funds affiliated with Blackstone Group L.P. (BX) are taking a $200 million stake in the company in newly issued series A convertible preferred stock. As part of the deal, John McCarvel also has announced his retirement as CEO of Crocs. Guidance is coming in soft as well.

Also as a part of the deal, Crocs will increase its stock repurchase program to $350 million. The company's aim is to reduce its publicly traded common stock float by about 30%. Crocs said that it has been unable to repurchase stock while negotiating this transaction. Now that the deal is finalized, the company plans to start buying back stock in the first quarter of 2014.

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The preferred stock will have a 6.0% cash dividend rate and is convertible into shares of common stock at $14.50 per share. Crocs closed on Friday at $13.33, and its 52-week trading range is $11.96 to $17.95. On a fully converted basis, this preferred stock will represent 13.8 million common shares. That comes to about 13% of the fully diluted common shares outstanding after the issuance.

Crocs said:

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At any time after three years from the issuance date, if the closing price of Crocs common stock equals or exceeds $29.00 for a period of 20 consecutive trading days, then the shares of preferred stock will, upon notice from Crocs, convert into shares of common stock. At any time after eight years from the issuance date, Crocs will have the right to redeem, and the holders of the Preferred Stock will have the right to require Crocs to repurchase, all or any portion of the Preferred Stock at 100% of the stated value plus any accrued but unpaid dividends.

Crocs also reaffirmed the low end of its prior fourth-quarter guidance, which means it is softer than expected. Revenue was put at about $220 million, with a loss of $0.23 per share. The Thomson Reuters consensus revenue estimate was $222.25 million, and it should be pointed out that this would represent a drop in sales of more than 2% from a year ago.

The long and short of the matter is that Crocs is not being acquired. Still, this is a step in the right direction of a long, slow peaked-out story. 24/7 Wall St. had shown even back in November that buyout chatter seemed a bit like a crock. Now we all know.

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Before you think of this stock buyback solely in comparison to the nearly $1.2 billion market value as of Friday's close, realize this may not come as rapidly as some investors would hope. The company said, "We intend to be patient, methodical and opportunistic as we execute this expanded buyback plan."

Updated 9:10 a.m. EST: Sterne Agee has raised the Crocs stock rating up to Neutral from Underperform. The firm's Sam Poser said, "The retirement of John McCarvel from his CEO post and from the board of Directors removes a large road block to success. Blackstone’s involvement (13% ownership upon conversion) may serve as a catalyst for positive change, including closing underperforming stores and limiting future store openings. While increased share repurchases should help EPS growth, fixing the fundamentals of the business will require more extensive efforts."

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