Prana back in the hands of private ownership after Claiborne sells

Liz Claiborne Inc. (NYSE: LIZ) has entered into an agreement to sell substantially all of the assets and liabilities of Prana to Prana Living LLC, a company formed by Prana’s management team and Steelpoint Capital Partners for a purchase price consisting of a $36.5 million cash payment payable at closing and a contingent cash payment of up to $4.0 million based on actual 2008 EBITDA.

Liz Claiborne announced in a news release that the company expects to realize net cash proceeds of $18.1 million at closing as a result of the sale, after settlement of a contingent earn out obligation of $18.4 million payable to the Prana founders in connection with the 2005 acquisition of Prana. This $18.4 million payment is expected to be recorded as a charge to first quarter 2008 earnings.

The transaction is expected to close in the first quarter of 2008. To ensure a smooth and orderly transition for retail partners, vendors and employees, the company has agreed to provide certain transition services to Prana Living LLC.

For Beaver Theodosakis, Prana president and founder, this move puts him back in the driver’s seat of being able to focus on product and retailers again, but doesn’t really change his ownership position other than shifting some percentage points here and there. He told SNEWS® that the management team still had 40 percent equity, even under Liz Claiborne ownership, in the form of an earn out.

“We never really said we were selling the company,” Theodosakis told us. “We were entering into a partnership really, although since it was with a public company, we didn’t really have the ownership on the books. We also had a purchase agreement clause that gave us control and final say on who our company could be sold to, which Claiborne executives agreed to because at the time they had no intentions of ever selling us.”

Under the terms of the new deal, the earn out due the Prana team was paid, and then much of it reinvested so that Prana management, which includes Theodosakis, his wife Pam Theodosakis, and Demian Kloer, maintains a 30 percent share of the new corporation, Prana Living LLC. Steelpoint owns the other 70 percent share and Theodosakis said he could not be more pleased.

Scott Tierney, managing director of Steelpoint, has been a Yogi for the last seven years, Theodosakis told us, and already knew the Prana brand and its strength in the outdoor and yoga markets well. When he learned Claiborne might be shopping Prana, he contacted Theodosakis by phone and invited him to lunch — just 20 minutes down the road in Southern California.

Now that the deal is done, Theodosakis said that he’s finally glad that “the boss” can finally be focused once again on the core business of “making and selling great product.”

“I was spending a minimum of five hours a day on finding the right partner for us for the last eight months, and it has been very personally taxing and it’s been a big distraction for our management team. Now, the deal is basically done, we have some reintegration work to do with internal systems that Liz integrated, but fortunately, it is not too much,” said Theodosakis, pointing out that one of the blessings of being 3,000 miles away from Claiborne’s headquarters meant the company left Prana pretty much alone to run itself.

When asked how long Steelpoint planned to hold its investment position in Prana, Theodosakis, while acknowledging it would not be forever, stated Steelpoint has a history of long-term investments, held for more than the typical five-year period most private equity firms seem to have as a standard timeline.

“Scott and Jim told me, ‘You guys run this and let’s see where it goes. They will not hold it forever, but there are all kinds of ways in there for management to buy more shares to be the major owner and a lot of ways for us to structure such a deal. For now, though, we are fully focused on running a great business,” said Theodosakis.

SNEWS® View: In 2005, Liz Claiborne paid a reported $34.4 million for Prana. In 2008, it sold the investment for a mere $36.5 million. Not exactly a great deal for the company, but one that was handled in the best way possible, according to insiders. With only one member of the original Claiborne executive team still on board since the Prana acquisition, Claiborne remained committed, we were told, to ensuring Prana went to the best possible situation to ensure the brand’s continued success, protecting both the management team and Prana’s retail base. For Theodosakis, he told us he does not regret the Liz Claiborne sale at all, and would do the same thing if the opportunity presented itself in the same manner today. Fortunately, Prana went to a company with ethics, and Theodosakis and team ensured its future by working diligently and tirelessly to lock in a purchase agreement that provided necessary protections. If there is any constant in this world, it is that even with the best of business plans and intentions, markets and situations will change, and change is inevitable. It appears that Prana is coming out on top, and is free once again to chase dreams and focus on, as Theodosakis likes to say, “making our product better and telling the story of our brand better.”