Reports Monday that Ascena Retail Group Inc. (NASDAQ:ASNA) has agreed to buy Ann Inc. (NYSE:ANN) for more than $2.1 billion sent ANN stock soaring, while ASNA stock pulled back after an initial bump.
Ascena Retail Group was up as much as 10% early Monday before settling back to a loss of 2%, while ANN stock bolted past $46 per share and remained there throughout the day, an increase of nearly 20%.
So let’s take a look at what the combined (ASNA and ANN) company will look like.
Ascena Retail Group has a market cap of $2.2 billion while ANN has a market cap of $2.1 billion. The deal would give the combined companies 12 months trailing sales of more than $7.3 billion and trailing gross profit of nearly $4 billion.
Both organizations have about $200 million in cash on hand and neither had a lot of debt — $127 million for ASNA and $3 million for ANN — but the merger will likely add debt to the new balance sheet as ASNA completes the purchase.
Furthermore, the Ascena Retail Group operates 3,900 locations throughout the U.S. and Canada with its retail brands comprising of Justice, Brothers, Lane Bryant, Cacique, Right Fit, Maurices, Studio Y, Dressbarn, Catherines, Serenada, Maggie Barnes and Liz&Me. ANN currently has more than 1,000 locations carrying the names Ann Taylor, Loft and Lou & Grey.
The sale will create a very large woman’s fashion retailer that will have offerings in all but the extremely high-end range of women’s fashion. By offering products to the low-, middle- and high-end consumers, ASNA may be able to better ward off economic downturns.
Owning ANN gives ASNA an impressive footprint of nearly 5,000 locations and gives the new company the ability to reduce operating costs through better efficiencies. Furthermore, by adding in new brands, ASNA should also be able to react to constantly changing fashion trends.
But, there are some big issues investors need to deal with when it comes to this merger.
First, a diversified ASNA won’t neccessarily be a better company. The fashion industry is all about what’s new, hot and trendy — if designers all miss the boat, than it may take less to bring the whole ship down.
Ascena Retail Group is also paying a large amount of money for ANN, especially considering ANN has not been performing all that well lately. ANN only has positive comps in one of the last four quarters. The company experienced revenue growth of just 1.4%, less than the 1.6% inflation rate in 2014, and net income dropped by 34% during its most recent fiscal year.
Ascena Retail Group is paying $37.34 in cash and 0.68 shares of ASNA for each share of ANN. For ANN shareholders that is a great deal, but ASNA shareholders are being massively diluted to buy a company that may be overvalued.
The initial jump ASNA shares made following the announcement was simply excitement buying; shareholders selling now look to be making the better move. The Ascena Retail Group-ANN merger may turn out to be a great in the long run, but I think it will take a lot of time for the true value of the merger to be felt by shareholders.
ASNA shareholders should take their profits now and give the combined company a few quarters to perform before investing again.
As of this writing, Matt Thalman did not hold a position in any of the aforementioned securities. Follow him on Twitter at @mthalman5513.
