by Will Ashworth | February 24, 2014 12:46 pm
Men’s Wearhouse (MW) added yet another wrinkle to its suit retailer soap opera on Monday by upping its offer for Jos. A. Bank (JOSB) Monday to $63.50 per share, 10% higher than its previous offer.
To bring everyone up to speed, we’re now at our fourth offer in the series. The history:
Complicating matters even further is JOSB’s existing bid to acquire privately held Eddie Bauer for $825 million. Men’s Warehouse says it will pay an additional $1.50 per share to JOSB shareholders if it’s allowed to perform a small amount of due diligence.
At either price, Men’s Wearhouse wants nothing to do with Eddie Bauer, but nonetheless, it has become abundantly clear that MW is desperate to buy Jos. A. Bank.
JOSB management says it has been pursuing the lifestyle brand for more than two years. With the moderately priced suit business growing in the low single-digits, it feels an additional growth engine is vital to its future success. The two companies have a very complimentary customer base. Men who shop at Jos. A. Bank for suits likely also shop at Eddie Bauer. In addition, Eddie Bauer has a significant following from women; a combined entity broadens its horizons, not to mention its customer base.
While some would argue that Jos. A. Bank would have been smarter to go after Brooks Brothers, I think the purchase makes a lot of sense if you are committed to the retail mid-market and want to remain independent. Upon completion of the deal, Golden Gate Capital becomes its largest shareholder with 16.6% of JOSB stock.
JOSB gets the growth it needs while obtaining a friendly shareholder. It’s a win/win scenario.
The other part of the Eddie Bauer deal was the announcement the company would buy back 16.4% of JOSB stock upon completion of its acquisition. Offering $65 per share, the JOSB stock repurchase accomplishes two things: First, it eliminates any acquisition-related dilution and secondly, it establishes a floor price of $65 for JOSB stock.
In addition, because the JOSB/Eddie Bauer tie-up allows it to back out should it receive an unsolicited offer for JOSB stock that’s better than the value created by a merger, it virtually guaranteed a third offer from Men’s Wearhouse.
No one should be surprised by today’s announcement given the terms of the Eddie Bauer deal.
Jos. A. Bank’s brilliant chess move described above has set the wheels in motion for a big win for JOSB stock. (And for what it’s worth, it looks like a big win for Men’s Wearhouse; MW stock is up 8% today, too).
Investors on both sides of this battle see the common sense in a merged entity. Together, the two businesses have more than 1,700 stores in Canada and the United States, providing significant cost savings and reach. Where its stores overlap, it can close those locations — saving money while still ensuring it maintains a geographic presence.
Men’s Wearhouse is desperate to make this happen because in addition to everything mentioned above, it also eliminates its biggest competition.
Aside from JOSB, who are its competitors? Think Macy’s (M) and Kohl’s (KSS). You might also consider Nordstrom (JWN) and Brooks Brothers, although their price points are generally higher. Beyond that, we’re mostly talking about independent menswear stores across the country.
With JOSB as friend rather than foe, MW could go to work capturing more of the suit market.
In addition to upping its offer for Jos. A Bank, Men’s Wearhouse has indicated it’s willing to offer MW stock in lieu of cash to those JOSB shareholders interested in benefiting from the merged entity. To make this happen, it has filed suit against JOSB requesting that its board revoke its poison pill measures and be prevented from carrying out the Eddie Bauer transaction. The lawyers are having a ball.
Who knew the suit business could be so nasty?
However, Men’s Wearhouse knows this is its last best chance to capture JOSB. If it doesn’t use every tactic possible to bring a deal to fruition, it’s possible the largest MW shareholders could turn around and sue the board for failing to exercise its fiduciary duties.
With the stakes so high, it’s hard to imagine a deal getting done by MW’s March 12 tender-offer deadline. I’d look for that to be extended sometime in the next week or two.
I personally don’t have a problem with the Eddie Bauer acquisition. It diversifies Jos. A Bank’s business into complimentary areas. If Men’s Wearhouse really wants JOSB as badly as it appears it does, it will either raise the final purchase price beyond $65 (the JOSB share repurchase is $65) or agree to a transaction that includes Eddie Bauer.
If I were Men’s Wearhouse CEO Doug Ewart and the board, I’d be desperate too. First, they showed founder George Zimmer the door, then they fumbled what should have been a slam-dunk merger.
At this point, if Men’s Wearhouse doesn’t acquire JOSB, MW stock will take a huge beating.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.
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