Item 1.01.
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Entry into a Material Definitive Agreement.
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Purchase Agreement
On June 27, 2018, Differential Brands Group Inc. (the
“Company”) entered into a Purchase and Sale Agreement (the “Purchase Agreement”) with Global
Brands Group Holding Limited (“GBG”) and GBG USA Inc., a wholly-owned subsidiary of GBG (“GBG USA”),
to purchase a significant part of GBG’s and its subsidiaries’ North American business, including the wholesale,
retail and e-commerce operations, comprising all of their North American kids business, all of their North American
accessories business and a majority of their West Coast and Canadian fashion businesses (collectively, the
“Business”) for a purchase price of $1.38 billion, to be paid in cash and subject to adjustment (the
“Purchase Price”). The acquisition contemplated by the Purchase Agreement (the “Transaction”) is
expected to close in the third quarter of 2018, which will result in the combination of the Business with the Company’s
existing omni-channel platform, comprised of the Robert Graham, Hudson and Swims brands.
Prior to the consummation of the Transaction, and as a
condition to the Company’s obligation to close the Transaction, GBG agreed to, and cause its subsidiaries to, undergo
an internal reorganization pursuant to which all of the outstanding equity securities of certain of GBG’s subsidiaries
that operate the Business, and certain assets and liabilities related to the Business, will be contributed to a newly formed
Delaware limited liability company (“NewCo”). Pursuant to the Purchase Agreement, at the closing, subject to the
satisfaction or waiver of the closing conditions, including those discussed below, the Company will purchase all of the
outstanding equity interests of NewCo, together with certain additional assets related to the Business, and will assume
certain additional liabilities related to the Business.
As discussed in greater detail below under the heading
“Debt Commitment Letters,” Ares Capital Management LLC (“Ares”), HPS Investment Partners, LLC
(“HPS”) and GSO Capital Partners LP (“GSO”), on one hand, and the Company, on the other hand, entered
into Debt Commitment Letters (as defined below), pursuant to which, subject to the terms and conditions set forth therein,
Ares, HPS and GSO have agreed to provide fully committed debt financing for the Transaction (the “Debt
Financing”). Among the conditions to the funding of the Debt Financing, the Company has agreed to raise an aggregate of
$150 million of equity capital in the form of cash investments in shares of common stock of the Company. In this regard, the
Company expects that GSO, Ares and Jason Rabin, GBG’s President who is expected to lead the management team at the
Company following the closing of the Transaction, will each invest a minimum of $25 million at a purchase price of
approximately $8.00 per share of common stock of the Company. The Company expects that the remaining equity capital will be
provided by other members of GBG’s existing U.S. management team and other co-investors on substantially similar terms
(such equity issuances, together with shares of common stock of the Company to be issued to GSO in connection with the Debt
Financing, the “Equity Issuance”). Concurrently with the Equity Issuance, certain affiliates of Tengram
Capital Partners, L.P. (the “Tengram Stockholders”) have also agreed to convert, in accordance with their
respective terms, all of their shares of Series A Convertible Preferred Stock and Series A-1 Convertible Preferred Stock into
shares of the Company’s common stock. Following such conversion and pro forma for the Transaction, the Company will not
have any shares of preferred stock issued and outstanding.
The closing of the Transaction is subject to satisfaction
or waiver of customary closing conditions, including (i) the expiration or termination of the applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act; (ii) the approval of the Transaction by GBG’s stockholders in
accordance with applicable Hong Kong listing rules; (iii) the approval of the Equity Issuance by the Company’s
stockholders pursuant to NASDAQ listing requirements; (iv) each of GBG and the Company having delivered all required closing
deliverables (including certain third party consents in the case of GBG); and (v) the entry into a mutually agreed transition
services agreement. Concurrently with the execution and delivery of the Purchase Agreement, stockholders of GBG, collectively
representing approximately 25.7% of the issued and outstanding voting stock of GBG, entered into a support agreement with the
Company, pursuant to which they agreed to vote their shares in favor of the Transaction.
The Purchase Agreement contains certain customary termination
rights, including that each of the Company and GBG has the right to terminate the Purchase Agreement on or after 5:00 p.m. New
York City Time on October 31, 2018 if the closing conditions to the Transaction have not been fulfilled by such date. If GBG terminates
the Purchase Agreement due solely to the Company’s failure to consummate the Transaction because the Company does not receive
the Debt Financing in accordance with the terms and conditions of the Debt Commitment Letters, the Company will
be required to pay GBG a termination fee of $2.5 million. If either party terminates the Purchase Agreement due to a willful breach
of the Purchase Agreement by the other party that causes a closing condition to fail, the breaching party will be required to pay
the terminating party a termination fee of $5 million. In addition, each party also has the right to specifically enforce the obligations
of the other party in the Purchase Agreement to consummate the Transaction; provided, however, that GBG and GBG USA cannot require
the Company to consummate the Transaction unless, among other things, (i) the Debt Financing is funded, or will be funded, at the
closing of the Transaction in accordance with the terms and conditions of the Debt Commitment Letters; (ii) all of the conditions
to closing the Transaction have been satisfied or waived (or will be satisfied or waived at the closing of the Transaction); and
(iii) GBG confirms that it will close the Transaction.
The Purchase Agreement includes customary representations, warranties
and covenants for a transaction of this nature. Among other things, for the period up until the earlier of the closing of the Transaction
and the termination of the Purchase Agreement, GBG and GBG USA have agreed to conduct the Business in the ordinary course of business
in accordance with applicable law and otherwise refrain from taking certain actions without first obtaining the Company’s
written consent. GBG and its affiliates have also agreed not to (i) solicit, encourage, negotiate, facilitate, approve or recommend
any alternative transaction or (ii) provide any non-public information regarding, or access to, the Business in connection with
an alternative transaction. The parties have also agreed to use their reasonable best efforts to consummate the Transaction including,
with respect to the Company, taking all steps necessary to avoid or eliminate every impediment imposed on the Company or its affiliates
under applicable U.S. and non-U.S. antitrust law. Subject to certain limitations and conditions set forth in the Purchase Agreement,
the parties have agreed to indemnify each other for, among other things, breaches of representations, warranties and certain covenants
contained in the Purchase Agreement.
Debt Commitment Letters
In order to secure funding for the Transaction, on June 27,
2018, the Company entered into (i) a commitment letter (the “First Lien Commitment Letter”) with Ares and HPS (collectively,
the “First Lien Commitment Parties”) and (ii) a commitment letter (the “Second Lien Commitment Letter”
and together with the “First Lien Commitment Letter, collectively, the “Debt Commitment Letters”) with GSO (together
with the First Lien Commitment Parties, collectively, the “Commitment Parties”), pursuant to which the Commitment Parties
have agreed to provide, or cause to be provided through their respective managed funds, the Debt Financing. Pursuant to the
Second Lien Commitment Letter and in consideration of its provision of the debt financing under the Second Lien Facility (defined
below), funds managed by GSO will also receive shares of common stock of the Company in an aggregate amount equal to 25% of the
aggregate common stock outstanding on the date of the Transaction on a fully diluted basis, and will enter into a shareholders
agreement on terms to be agreed.
The Debt Financing is anticipated to be comprised of: (i) a
first lien term loan facility in a total principal amount of $685.0 million, which facility matures five years from closing (the
“First Lien Term Facility”); (ii) a revolving credit facility in a total principal amount of up to $150.0 million,
which facility matures four and a half years from closing (the “Revolving Credit Facility”); and (iii) a second lien
term loan facility in a total principal amount of $674.0 million, which facility matures six years from closing (the “Second
Lien Facility”). Prior to the closing, the First Lien Commitment Parties have the right to reduce the size of the Revolving
Credit Facility to $100.0 million with a corresponding increase in the size of the First Lien Term Facility to up to $735.0 million.
The amount of the financing to be provided pursuant to the
Debt Financing is subject to adjustment, including based on pro forma compliance with certain closing date leverage ratios,
and the funding of the Debt Financing is contingent on the satisfaction of certain conditions set forth in the Debt
Commitment Letters. In particular, (i) the amount of financing under the First Lien Term Facility will be automatically
reduced to the extent that the first lien leverage ratio on the closing date exceeds 3.25 to 1.00; (ii) the First Lien Term
Facility and Revolving Credit Facility will not be required to be funded if the automatic reduction described in the
preceding clause (i) would cause the commitments under the First Lien Term Facility to be reduced by more than 20%; and
(iii) the amount of financing under the Second Lien Facility will be automatically reduced to the extent that the total
leverage ratio on the closing date exceeds 5.75:1.00 (subject to certain adjustments). In addition, the Debt Financing is
conditioned upon the occurrence of the Equity Issuance and the Company obtaining factoring agreements of a specified size
on commercially reasonable terms. Furthermore, the funding of the Second Lien Facility will not be required to be funded
if, among other things, the Purchase Price is reduced by greater than 10% without GSO’s consent or if the Company fails
to obtain third party consents under certain material agreements.
The interest rates under the Debt Financing are anticipated
to be follows:
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For the First Lien Term Facility: the lender’s alternate base rate (“ABR”) (with a 2.50% floor) plus 5.00%
for base rate loans or adjusted LIBOR (with a 1.50% floor) plus 6.00% for LIBOR Rate Loans, with two 0.25% step downs upon achieving
and maintaining a first lien leverage ratio equal to or less than 2.75 to 1.00 and 2.25 to 1.00, respectively.
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For the Revolving Credit Facility: ABR (with a 1.00% floor) plus 5.00% for base rate loans and adjusted LIBOR (with a 0% floor)
plus 6.00% for LIBOR rate loans, with two 0.25% step downs upon achieving and maintaining a first lien leverage ratio equal to
or less than 2.75 to 1.00 and 2.25 to 1.00, respectively.
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For the Second Lien Facility: LIBOR (with a 1.50% floor) plus 7.00%, plus 2.75% payment-in-kind interest (“PIK”)
from the closing of the Transaction until December 31, 2019, and adjusted LIBOR (with a 1.50% floor) plus 8.00%, plus 1.25% PIK
thereafter (subject to certain adjustments and compliance with certain leverage ratios).
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The Debt Financing also will be subject to certain fees, including
arrangement fees, upfront fees, agent fees, unused commitment fees and mandatory prepayment premiums. Once funded, the Debt Financing
is anticipated to require the Company to comply with certain customary covenants, including financial ratios and negative covenants,
and contain certain customary events of default.
The Debt Financing as outlined in the Debt Commitment Letters,
together with investments from certain members of management, co-investors and lenders, will be used to finance the Purchase Price,
repay and replace the Company’s existing indebtedness (except as otherwise provided in the Debt Commitment Letters) and pay
all of the fees, costs and expenses incurred in connection with the Transaction. The Debt Commitment Letters provide that, subject
to the satisfaction or waiver of certain conditions, the Debt Financing would be funded concurrently with the closing of the Transaction
and secured by first and second priority liens on substantially all of the assets of the Company and certain of its subsidiaries.
Shareholder Approval in connection with Equity Issuance
Given that the Equity Issuance is expected to result
in the issuance of more than 20% of the shares of the Company’s common stock outstanding before such issuance,
the Company’s stockholders must approve the Equity Issuance pursuant to NASDAQ listing rules, which require any
such issuance to be approved by a majority of the total votes cast at a meeting in which a quorum is present or by the
written consent of the holders of a majority in voting power of the outstanding shares of capital stock entitled to vote thereon.
Concurrently with the execution and delivery of the Purchase Agreement, the Tengram Stockholders, which collectively
represent approximately 44.9% of the Company's outstanding voting capital stock, entered into a support agreement with GBG,
pursuant to which they agreed to vote their shares in favor of the Equity Issuance. The Company expects to obtain written
consent from a limited number of existing stockholders of the Company, which together with the Tengram Stockholders, would
constitute the requisite shareholder vote to approve the Equity Issuance. In connection therewith, the Company expects to
mail to the stockholders of the Company an information statement in compliance with applicable securities laws prior to
closing of the Transaction.
Incorporation by Reference
The foregoing description of the Purchase Agreement and Debt
Commitment Letters, and the transactions contemplated thereby, does not purport to be complete and is qualified in its entirety
by reference to the Purchase Agreement, First Lien Commitment Letter and Second Lien Commitment Letter, copies of which are filed
as Exhibits 2.1, 10.1 and 10.2, respectively, hereto and are incorporated herein by reference. It is not intended to provide any
factual information about the Company, GBG, GBG USA or their respective subsidiaries and affiliates. The Purchase Agreement contains
representations and warranties by each of the parties to the Purchase Agreement, which were made only for purposes of that agreement
and as of specified dates. The representations, warranties and covenants in the Purchase Agreement were made solely for the benefit
of the parties to the Purchase Agreement; are subject to limitations agreed upon by the contracting parties, including being qualified
by confidential disclosure schedules; may have been made for the purposes of allocating contractual risk between the parties to
the Purchase Agreement instead of establishing these matters as facts; and are subject to standards of materiality applicable to
the contracting parties that may differ from those applicable to investors. Investors should not rely on the representations, warranties
and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company, GBG, GBG
USA or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations,
warranties and covenants may change after the date of the Purchase Agreement, which subsequent information may or may not be fully
reflected in the Company’s public disclosures.