The Hot Topic Takeover Sparks its First Lawsuit

Hot Topic HOTT shares rose to a six-year high, Thursday, before closing at $13.87, up 29 percent. This on news from Reutersthat private equity firm Sycamore Partners plans to take the teen apparel retailer private in a $600 million deal.

Sycamore, founded by former retail specialist Stefan Kaluzny in 2011, says it will pay $14 per share, a 30 percent premium on Hot Topic's Wednesday close.

Sycamore Partners acquired women's apparel retailer Talbots for $193.3 million last year and is currently in negotiations to acquire Australian surfwear company Billabong International Ltd for $586.6 million.

Chains like Hot Topic that cater mainly to teenage shoppers have struggled recently since their core customer base has less discretionary income.

That said, Hot Topic knows the taste of success, such as when it parlayed merchandise related to the Twilight movie series in 2009 to its biggest sales year ever ($761 million).

Daily Finance quotes Sycamore’s Kaluzny as saying, "We are excited to partner with the Hot Topic management team and all of its talented and passionate employees.” Adding, "We look forward to supporting the company's continued growth."

But like most acquisitions, somebody isn’t too happy. The law office of Brodsky & Smith, in a press releaseThursday, said that it is investigating potential claims against the Hot Topic Board of Directors related to the proposed acquisition by Sycamore.

The law firm claims that while, under the proposed terms, Hot Topic shareholders would receive only $14.00 per share; one analyst has set a $16.40 per share price target for Hot Topic stock. According to Yahoo Finance, the target range for HOTT is from $11.00 to $16.40 with a median target of $13.00.

Brodsky & Smith says the focus of their investigation will revolve around whether the Hot Topic board of directors failed to conduct an adequate and fair sales process prior to agreeing to the deal with Sycamore.

Other apparel retailers have been mentioned as potential acquisition targets in recent months. They include Aeropostale, Inc. ARO, and American Eagle Outfitters AEO which sells clothes, shoes, and accessories to the same demographic as Aeropostale, but at a higher price point.

The Jones Group JNY has been the subject of acquisitions discussion, especially after the mid-priced retailer, in 2011, bought Kurt Geiger, Europe's largest luxury shoe retailer for $350 million. This makes JNY 20 percent international and gives it a broad range of products in several price ranges.

Finally, Gap GPS, a $9.1 billion fast-fashion retailer, has been rumored to be an acquisition target for Hennes & Mauritz and others. GPS operates four other brands: Old Navy, Banana Republic, Piperlime, and Athleta.