Stay up for the end of this bedtime story…

Linens N Things Inc., (LIN) a top retailer of bedding, towels and home goods, agreed last week to be acquired by an investment firm (Apollo Investment LP) in a deal worth about $1.3 billion and a 6% premium over the pre-announcement share price. Good news, right? Well, not completely. In the 10-Q Linens filed after the bell on Friday, the Company disclosed that:

The Merger Agreement contains certain termination rights and provides that, upon the termination of the Merger Agreement under specified circumstances, the Company may be required to pay Apollo a termination fee equal to $27 million and expenses up to $5 million. The debt financing for the transaction is subject to various conditions, including the Company achieving EBITDA of not less than $140 million for the full 2005 fiscal year and comparable net sales of not less than negative 6% for the 2005 fourth quarter

Not such good news when the company is reporting a YTD 7.7% decrease in sales and only $54.5 million in YTD EBITDA. Looks like the pressure was enough for the Board to give management some incentive to close the deal. In the exhibits to this 8-K filed yesterday, the Board approved payouts of $500,000 for William Giles, the Company’s CFO, and $250,000 for Senior Vice-President Brian Silva — if the merger consummates.

We’ll just have to stay tuned for fourth quarter earnings to see how this sheet maker’s drama unfolds.