Fast Retailing + Gap: Would the Fishers Sell?

by Will Ashworth | February 25, 2013 9:06 am

In the investment business if you snooze, you lose.

The rumor that Japan’s Fast Retailing (PINK:FRCOY[1]) is interested in making a bid for Gap (NYSE:GPS[2]) — to fulfill founder and CEO Tadashi Yanai’s dream of becoming the world’s biggest retailer — is but a distant memory. Gap’s shares jumped the most they have in the past six months on the news to just under $33. A week later, they’re back to where they were before speculation began.

So … where to from here?

Rather than dwell on whether a deal generally makes sense for investors, I’m more interested in the company’s larger investors, as they ultimately will have the most pull.

Glenn Murphy

Current CEO Glenn Murphy took over in July 2007, and while it hasn’t been easy, the former drug store executive seems to have the company pointed in the right direction[3]. Professionally, I’m sure he’d like to see Gap fully realize its potential before handing over the reins to someone else, be it Fast Retailing or another company.

Within days of being hired back in 2007, Murphy bought 141,800 shares of Gap stock on the open market at an average price of around $15.65 per share, which means his $2.2 million investment currently is in the money. However, it took the better part of four-and-a-half years to get there, so it would have to be a really sweet deal for him to move over.

Of course, the ultimate decision rests with the Fisher family.

The Fishers

The Fisher family owns 38% of Gap’s stock, so no deal can happen without their approval — thus, speculating at this point makes little sense without understanding what their motivation would be for selling.

Don Fisher, who passed away in 2009, was extremely competitive; while he had many other pursuits in life, Gap was his baby well into senior citizenry. Gone now, I’m sure his sons Bill and Bob (both directors and in their 50s) would like to see a return to those halcyon days, if nothing else, then to show it was possible.

For a moment, let’s pretend Fast Company and Gap merge without any negotiations and at current valuations. The combined business would have approximately $27 billion in worldwide revenue and a market cap of $44 billion. It would be able to swing a very big stick around the world. Gap would benefit outside North America; Fast Retailing inside it.

It’s possible the Fishers could take an all-stock deal, but with Yanai owning 46% of Fast Retailing’s stock, a 50% premium still would leave Japan’s wealthiest person in control of the merged entity with 26% of the estimated $52 billion ($7.5 billion premium for Gap) company. The Fishers would have to settle for 17% of the business.

Do they want to be a small fish in a big pond?

Unlike Femsa (NYSE:FMX[4]) — which sold Mexico’s second biggest brewery to Heineken (PINK:HEINY[5]) in 2010 to focus on its other two businesses, taking 20% of Heineken as payment — the Fishers don’t have another big prize to keep them busy. However, selling for stock at least keeps them involved.

An all-cash deal certainly ends the legacy.

Bottom Line

Any offer from Fast Retailing (should it take place) will have to be done with the utmost care and sensitivity. If the family senses its business is going to be turned upside down, both it and Murphy would have no interest in negotiating a deal. Gap shareholders should view this as a good thing because any deal will come at a very steep price — certainly much higher than $33 per share.

And if no deal goes through? Well, I still believe Gap’s stock has a very bright future[6].

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

  1. FRCOY:
  2. GPS:
  3. pointed in the right direction:
  4. FMX:
  5. HEINY:
  6. believe Gap’s stock has a very bright future:

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