Talbots (TLB:US) Inc., which posted the worst returns of any U.S. retailer in the past decade, is now offering some of the biggest potential gains for traders willing to bet a deal with Sycamore Partners LP will finally close.
With the Hingham, Massachusetts-based women’s apparel chain yesterday trading 8 percent below Sycamore’s takeover bid of $2.75 a share, investors buying the stock today could post a 61 percent profit on an annualized basis if the acquisition is completed by the end of August. That would be the largest return for any pending all-cash deal in the U.S. of more than $100 million, according to data compiled by Bloomberg.
While MKM Partners says concern about pension liabilities and the parties’ track record of rejected and renegotiated deal prices earlier this year have made some traders wary of betting on the takeover closing, short sellers (TLB:US) have cut bearish bets by more than half since the end of May. Even as Sycamore’s tender offer expires this week, Tullett Prebon Plc and T2 Partners LLC say the private-equity firm is a motivated buyer and will get the acquisition done within a month. Completion would finally give traders a chance to make money after the retailer lost (TLB:US) more than 90 percent of its market value in the last 10 years.
“If the buyer didn’t want to buy it, he had plenty of opportunities to not buy it, and so it just seems very sensible for this transaction to close,” Glenn Tongue of New York-based T2 Partners said in a telephone interview. He owns Talbots shares and his Tilson Focus Fund beat (TILFX:US) 98 percent of peers this year, data compiled by Bloomberg show. “I don’t understand why people would not vote to tender into this transaction.”
Nicole Madison, a spokeswoman for Talbots at FTI Consulting Inc., said the company declined to comment. Michael Freitag, a spokesman for Sycamore at Joele Frank, Wilkinson Brimmer Katcher, said the firm had no comment on the deal.
Founded in 1947, the women’s retailer known for its traditional basics such as blazers, ballet flats and pearls has battered investors during the past decade, dropping 93 percent for the biggest decline among retailers currently in the Russell 3000 Index. Talbots has closed 90 facilities, posted five consecutive years of sinking sales (TLD:US) and has yet to name a replacement for Chief Executive Officer Trudy Sullivan, who was planning to retire last month.
Talbots saw sales shrink to $1.14 billion in the year ended Jan. 28 from a peak of $2.23 billion five years earlier. The retailer has suffered as Sullivan attempted to appeal to younger customers by introducing cocktail dresses and stilettos, alienating some of its traditional customers, who tend to be women over 35.
Sycamore announced in August that it owned a 9.9 percent stake, driving the shares up 18 percent to $4.07 in a single day. The private-equity firm made a $3-a-share unsolicited offer for Talbots in December, valuing it less relative to sales than any U.S. retail acquisition ever completed, according to data compiled by Bloomberg.
While Talbots rejected the bid in December and said the offer “substantially” undervalued the company, it began merger discussions with Sycamore in January. Talbots tumbled 15 percent to $2.67 on April 13 after saying first-quarter sales would decline from a year earlier. Sycamore then raised its price to $3.05 at the start of May and the companies agreed to exclusive negotiations.
Talbots said on May 25 that those talks broke down, sending the shares into a tailspin. The stock sank 41 percent to $1.51, and subsequently closed as low as $1.29 on May 30. The next day, Talbots said it accepted Sycamore’s $2.75-a-share bid.
While Talbots and Sycamore are likely to complete the transaction, the stock’s slump in May has investors skittish, said Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon.
“Because of what has transpired with the stock decline, and the back and forth with Sycamore, and the fundamentals declining, people are still taking a wait-and-watch approach,” Shah said in a phone interview.
Sycamore’s tender offer for the Talbots shares it doesn’t already own expires on July 13. Shah said the deadline will probably be extended about 10 business days. Keith Moore, an event-driven strategist at MKM Partners in Stamford, Connecticut, sees Sycamore extending the tender until late July or mid-August. Talbots said May 31 that it expects the deal to close in the third quarter.
In order to complete the deal, Talbots needs a letter from Pension Benefit Guaranty Corp. saying the U.S. government agency concluded its review of the company’s retirement plan. Talbots, in an effort to contain costs, halted contributions to the program in 2009. The pension is underfunded by $103 million, according to a June 27 regulatory filing.
The letter from PBGC “will be the factor that determines when it closes,” Moore said. The agency reviews corporate takeovers to ensure that they won’t “substantially weaken” the target company’s pension, according to PBGC’s website.
Moore said he doesn’t advise buying Talbots shares. The stock could fall to $1 should the deal fall apart, he wrote in a June 1 report.
“I wouldn’t recommend it even though it’s a very fat spread,” he said in a phone interview. “The problem is if something were to happen where this deal didn’t close, there would be a very unpleasant downside to it.”
The stock closed at $2.53 yesterday, up 9 cents since the first close after Talbots and Sycamore announced the $2.75 takeover price at the end of May. Talbots rallied (TLB:US) as much as 2 percent today to $2.58, the highest price since May 31. It closed at $2.56.
With the shares pinned near $2.50, short sellers have slashed bets that Talbots will fall. As of July 5, 6 percent of its shares outstanding were sold short, down from 14.3 percent on May 31, data (TLB:US) compiled by Markit show. That compared with the average of 2.9 percent for Standard & Poor’s 500 Index companies, the data show.
Stefan Kaluzny co-founded New York-based Sycamore last year after leaving Golden Gate Capital, where he was chairman of Express Inc., the clothing chain that targets 20- to 30-year-old men and women.
Sycamore bought a 51 percent stake in Columbus, Ohio-based Limited Brands Inc.’s Mast Global Fashions division last year. It may be able to leverage that purchase to help Talbots cut production costs, according to Steven Kiel, the founder of Annandale, Virginia-based Arquitos Capital Management LLC.
The private-equity firm cited its investment in Mast, one of the world’s largest independent apparel sourcing companies, as evidence that it has the experience needed to turn Talbots around, according to a December letter to the retailer’s board.
“Other than Sycamore, we believe there are, at best, a very limited number of potential acquirers who have the relevant experience, skills, interest and capital to invest in a struggling apparel company such as Talbots,” Kaluzny wrote in the letter.
Talbots would be Sycamore’s first acquisition of a public company, according to data compiled by Bloomberg. That puts pressure on Sycamore to complete the deal, Kiel said in a phone interview. He expects the transaction to close.
“Investors have kind of been jerked around the last six months,” said Kiel, whose firm owns more than 50,000 Talbots shares. “For Sycamore as a relatively new private-equity firm, I don’t think they would want to back out of their second acquisition at the last minute.”
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