Traders are betting that Jos. A. Bank Clothiers Inc.’s shunned $2.3 billion takeover attempt of larger competitor Men’s Wearhouse Inc. may be just the first step in tailoring the perfect fit.
Men’s Wearhouse rejected the $48-a-share offer this week, saying it “significantly undervalues” the clothing chain. The board may have a point, Stifel Financial Corp. said, with data compiled by Bloomberg showing the profit multiple is cheaper than the median for U.S. retail deals in the last five years. Raising the offer to $55 a share would still add value for Jos. A. Bank shareholders (JOSB:US), based on the potential to increase earnings and cut costs, said Albert Fried & Co.
Founder George Zimmer, known for his starring role in the company’s commercials, put Men’s Wearhouse in play when he was fired as executive chairman in June over disagreements with the board, including his desire to evaluate going private. With the stock up 26 percent (MW:US) since the Jos. A. Bank bid, investors are wagering Men’s Wearhouse will reach some sort of deal, said MKM Partners LLC.
“It’s trading (MW:US) here on the expectation that Jos. A. Bank will come back with a higher offer,” Keith Moore, an event-driven strategist at Stamford, Connecticut-based MKM, said in a phone interview. “That’s what I think will happen.”
A representative for Men’s Wearhouse declined to comment on the potential for negotiations with Jos. A. Bank or higher bids.
Jos. A. Bank said in a statement that the rejection by Men’s Wearhouse was “inexplicable” and that it would continue to pursue the transaction. A representative for Hampstead, Maryland-based Jos. A. Bank declined to comment on whether the company would raise its offer, while saying the current bid was fair.
Before today, shares of Jos. A. Bank had surged 9 percent since the deal was announced, giving the company a market value of $1.3 billion yesterday. Men’s Wearhouse shares (MW:US) climbed 28 percent to a six-year high of $45.03 the day of the Oct. 9 proposal, before falling 1.2 percent yesterday. It had a market value of $2.1 billion yesterday.
“If people really believed there was no chance of a deal, Men’s Wearhouse would be a lot lower,” said Moore of MKM. “The only way to continue to pursue it is through a higher offer. The key thing is going to be whether Jos. A. Bank will offer a price high enough that the Men’s Wearhouse board will feel compelled to accept.”
Today, Men’s Wearhouse rose 3.3 percent to $45.95, a new six-year high. Jos. A. Bank rose 7.2 percent to $48.67, the highest closing price in more than 10 months.
The risk for traders is if the board isn’t willing to sell at any price, Moore said.
Men’s Wearhouse said on Oct. 9 that it adopted a poison pill, which would make a hostile takeover of the company more expensive, and now requires two-thirds of shareholders to approve changes to its bylaws.
Jos. A. Bank has yet to secure all the financing for the deal, with adviser Goldman Sachs Group Inc. saying it’s “highly confident” that debt funding can be obtained. Private-equity firm Golden Gate Capital is providing $250 million of equity financing for the bid, according to a statement this week.
Jos. A. Bank’s (JOSB:US) bid represents a 40 percent premium to Men’s Wearhouse’s average stock price in the 20 days before the offer was disclosed, the highest since 2010 for a U.S. retail deal of more than $500 million, according to data compiled by Bloomberg.
Even so, Jos. A. Bank said in a presentation this week that the proposal values Men’s Wearhouse at 8.3 times trailing 12-month pro-forma earnings before income, taxes, depreciation and amortization. That’s less than the industry median of 8.9 times for deals in the last five years, data compiled by Bloomberg show.
“The valuation is at a slight discount to recent relevant transactions in the specialty apparel space,” Richard Jaffe, a New York-based analyst at Stifel, wrote in an Oct. 9 note. “We anticipate future proposals from JOSB with increased premiums.”
Jaffe said Men’s Wearhouse should receive at least $52 a share in a takeover.
Jos. A. Bank has been vocal about making acquisitions as it contends with pressure from shareholder BeaconLight Capital LLC to put cash to use. That could mean it’s willing to raise the bid for Men’s Wearhouse, particularly given the potential boost to earnings and opportunities to trim overheard and marketing expenses, David Mann, an analyst at Johnson Rice & Co., wrote in an Oct. 9 report.
Jos. A. Bank said in its presentation the deal would boost earnings immediately, before accounting for synergies.
The clothing chain could offer at least $55 a share, or about 15 percent more than the current bid, and still generate value for its shareholders, according to Sachin Shah, a special situations and merger arbitrage strategist at New York-based Albert Fried. That would be 24 percent more than yesterday’s closing price.
“There’s a lot of money to be had” from a combination, Shah said in a phone interview. “If they do it at $55, it’s still worth a lot. Jos. A. Bank shareholders benefit, obviously Men’s Wearhouse shareholders (MW:US) benefit.”
Men’s Wearhouse could instead buy Jos. A. Bank, although the likelihood is slim, Mann of Johnson Rice said. The most recent annual sales (MW:US) of about $2.5 billion at Men’s Wearhouse were more than twice those of Jos. A. Bank, and the chain also had almost twice the number of stores.
Ousted Men’s Wearhouse Chairman Zimmer also may still enter the mix and team up with a private-equity firm to make a bid, Colin Kelly, an analyst at Spokane, Washington-based Signia Capital Management LLC, wrote in an e-mail. His firm oversees about $600 million, including shares of Men’s Wearhouse.
Zimmer’s suggestion that Men’s Wearhouse consider going private and the offer from Jos. A. Bank have signaled to shareholders that the company’s stock price should be higher, said Jason Ronovech, a fund manager at Men’s Wearhouse shareholder Sentinel Investments, which oversees about $27 billion.
The $48-a-share bid “is too low for a strategic combination,” Ronovech said. If a higher offer “seems to be in the best interest of our shareholders, then we would be supportive of that. Men’s Wearhouse is a strong company and a great asset, and the stock doesn’t fully reflect that value.”
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