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J. Crew Planning a Public Offering of Madewell Denim Brand

Lisa Wolfson and Katherine Doherty

(Bloomberg) -- J. Crew Group Inc. plans to spin off its Madewell denim chain in a public offering, the company announced in a filing Friday, five months after announcing it was considering such a move.

The number of shares to be offered and the price range for the proposed offering haven’t yet been determined, according to the filing. The amount of the IPO is listed in the filing as $100 million, a placeholder that will likely change. Chinos Holdings Inc., which owns J. Crew, expects to use any proceeds to pay down debt and for general corporate purposes.

Madewell would follow Levi Strauss & Co. as the next denim company to tap public markets. It will have to gauge investor demand, however, as most apparel retailers’ shares have lost value this year. In J. Crew’s case, however, debt-related needs may take precedence over timing.

“The IPO could garner a substantial valuation and help pay down a meaningful portion of the over $1.7 billion in debt,” said Raya Sokolyanska, an analyst at Moody’s Investors Service. “But the ultimate ability to address J. Crew’s highly leveraged capital structure depends on the public market’s receptivity to apparel retailers and the company’s operating performance.”

New Debt

Chinos will be renamed Madewell Group Inc. before the IPO is completed, the company said. As part of the proposed transaction, Chinos will incur new debt and use the net proceeds it receives from the offering to repay its remaining debt obligations previous to the spinoff of the business from J. Crew.

The possibility that J. Crew will file for bankruptcy is listed in the filing as a risk for the IPO. J. Crew’s creditors could request that the court consolidate its assets and liabilities with Madewell assets and liabilities, according to the filing. The consolidation would allow the creditors to satisfy their claims from the combined assets as part of J. Crew’s filing, it said.

Madewell’s current Chief Executive Officer Libby Wadle and Chief Financial Officer of J. Crew Group Vincent Zanna will stay in their roles just until the separation, according to a filing. Michael Nicholson, who was named interim chief executive officer of J. Crew Group in April, will also take on the interim CFO role when Zanna leaves.

Madewell Expansion

Madewell, which has resonated with millennial shoppers, has opened a few stores in recent months and has plans to open at least six more by early next year from Southern California to Tampa, Florida. The company currently has about 130 locations. The expansion comes as its sister company J. Crew shuttered dozens of locations and rival mall stores including Gap Inc. are lowering store counts.

J. Crew was in negotiations with its creditors around a debt transaction that ended in a stalemate, according to its filings. The company said it made a proposal to a group of both loan and note holders but couldn’t reach an agreement with them. There are no further discussions scheduled at this time, it said.

The company proposed a separation of J. Crew and Madewell, an IPO of Madewell’s equity, the issuance of new debt, and a recapitalization of the company’s balance sheet, according to filings. To facilitate the proposed transactions, members of the creditor group would need to give their consent and tender their holdings.

Creditors’ Proposal

Creditors proposed a deal in which term loan and note holders would exchange a portion of their holdings for new debt with additional collateral from the IPO of Madewell and existing J. Crew common equity, according to the filings.

J. Crew is working with advisers from law firm Weil Gotshal & Manges and investment bank Lazard Ltd, according filings.

Creditors enlisted investment bank PJT Partners Inc., according to a proposal debt deal from the lender group titled “Project Paddle.”

(Updates with creditor negotiations in ninth paragraph)

--With assistance from Jordyn Holman.

To contact the reporters on this story: Lisa Wolfson in Boston at lwolfson@bloomberg.net;Katherine Doherty in New York at kdoherty23@bloomberg.net

To contact the editors responsible for this story: Anne Riley Moffat at ariley17@bloomberg.net, Jonathan Roeder, Michael Hytha

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