Men’s Wearhouse Inc. (MW:US) has gone from target to hunter in less than two weeks. Investors like the way it looks.
The retailer’s shares jumped after it offered to buy smaller rival Jos. A. Bank Clothiers Inc. (JOSB:US) for about $1.54 billion. While investment banks have pitched the idea to Men’s Wearhouse for years, the board was spurred to make the offer after the Houston-based company was itself targeted by Jos. A. Bank last month, two people with knowledge of the matter said. The switch from target to buyer is dubbed the Pac-Man defense, after the video game character that can sometimes eat the ghosts chasing after it.
Either way, the combination of the two companies could yield benefits in cost savings and expanded sales, according to Richard Jaffe, an analyst at Stifel Financial Corp. Men’s Wearhouse has a lucrative tuxedo-rental business that could be expanded to Jos. A Bank’s 611 stores, he wrote in a note. The combined company, with about 1,700 stores, would save on purchasing, customer service and marketing expenses.
“You now have both management teams agreeing it’s a strategically sensible deal,” Ed Bosek, a managing member of New York-based hedge fund BeaconLight Capital LLC, which owns shares of both retailers, said in phone interview. “You put these two companies together and you have the biggest publicly listed men’s apparel company with potentially very high margins and a good business.”
Men’s Wearhouse rose 0.9 percent to $51.07 at 11:06 a.m. in New York, while Jos. A. Bank gained 1 percent to $56.85 -- above the $55 a share offer -- indicating investors expect the purchase price to increase.
A spokeswoman for Men’s Wearhouse declined to comment further. Jos. A. Bank, based in Hampstead, Maryland, said yesterday that it had received the proposal and that its board would evaluate it and respond in “due course.”
Men’s Wearhouse could raise the bid to as much as $59 a share, putting the valuation in line with other recent deals in the industry, said Betty Chen, a San Francisco-based analyst for Mizuho Securities.
An offer for $59 a share would value Jos. A. Bank at about $1.32 billion, after subtracting net cash, or about 10 times the company’s earnings before interest, taxes, depreciation and amortization in the past year, according to data compiled by Bloomberg. Takeovers of U.S. apparel and shoe retailers announced in the last three years had a median Ebitda multiple of 9.1, according to data compiled by Bloomberg.
“A deal is clearly going to happen at this point, whether Men’s Wearhouse raises its offer or if Jos. A. Bank raises its bid,” John Kernan, a New York-based analyst at Cowen Group Inc., said in a phone interview. He has the equivalent of a hold rating on Men’s Wearhouse shares. “If you believe in these cost savings you can get some big earnings numbers.”
Kernan estimates the combined company could produce earnings of more than $6 a share long-term if the merger is successful. In the 12 months through August, the two companies earned $4.67 a share collectively, data compiled by Bloomberg show.
Jos. A. Bank in October offered to buy Men’s Wearhouse for about $2.3 billion. Men’s Wearhouse rejected that bid, saying it was too low and was opportunistic because it came at a moment of upheaval for the company, which in June ousted George Zimmer as executive chairman over disagreements about strategy.
Eminence Capital LLC, which owns about 9.8 percent of Men’s Wearhouse’s shares, urged the company to enter discussions aimed at getting a higher offer from Jos. A. Bank. Eminence Chief Executive Officer Ricky Sandler said he also would be “very happy” with Men’s Wearhouse buying the smaller Jos. A. Bank. Eminence said last week that it owns about 1.4 million shares of Jos. A. Bank as well.
“We are pleased to see that the board of Men’s Wearhouse agrees with us and recognizes the substantial benefits of merging with Jos. A. Bank,” Sandler said yesterday in an e-mailed statement.
By adopting the Pac-Man defense Men’s Wearhouse Chief Executive Officer Doug Ewert is deploying an uncommon tactic.
The term was coined during the Bendix Corp.’s 1982 attempt to take over Martin Marietta Corp. That contest ended with another company, Allied Corp., acquiring both Bendix and 39 percent of Martin Marietta. In 1999, France’s Total SA and Elf Acquitaine SA made competing bids for each other with Total eventually prevailing in a $54 billion deal.
“Given Men’s Wearhouse’s scale it makes more sense for them to be the acquirer rather than the target,” Mizuho’s Chen said in a phone interview. “Men’s Wearhouse has the ability to finance an all-cash transaction.”
In a presentation to other investors, Eminence estimated $75 million to $125 million of costs could be cut by combining the retailers, and that $175 million to $390 million of so-called synergies could be achieved from being able to cross-sell brands and products such as tuxedos.
Together, they’d have a market value of $4.88 billion, according to Eminence’s analysis.
The combined company would be the largest specialty retail channel for men’s clothing, Richard Jaffe, the Stifel Nicolaus analyst. Six of Men’s Wearhouses’s 10 largest shareholders (MW:US) also own shares of Jos. A. Bank. BlackRock Inc. owns the most shares of both companies with a 9.4 percent stake in Men’s Wearhouse and 8.6 percent in Jos. A. Bank, according to data compiled by Bloomberg.
Bank of America Corp. and JPMorgan Chase & Co. are serving as financial advisers to Men’s Wearhouse, and Willkie Farr & Gallagher LLP is providing legal advice.
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