By  on June 25, 2009

The Dress Barn Inc. is chasing its customers’ daughters.

The Suffern, N.Y.-based chain on Thursday inked a $157 million stock deal to acquire Tween Brands Inc. and its 908 Justice stores catering to seven- to 14-year-old girls.

The arrangement values Tween at $6.22 a share, a 20 percent premium over Wednesday’s closing price, but a significant comedown from the more than $45 the stock commanded two years ago.

“The valuation of the business is a small fraction of what it was,” David Jaffe, president and chief executive officer of Dress Barn, told WWD. “Given the low valuation, it became an opportunity for Dress Barn to be able to grow and merge with a terrific brand at a price that wasn’t going to bet the company. We see lots of upside opportunity here and not a whole lot of downside.”

Expected to close in the last three months of the year, the deal extends the company’s reach to three generations of shoppers. The Dress Barn division targets 35- to 55-year-old women, as the firm’s Maurices stores focus on the 17- to 34-year-old set.

Under terms of the agreement, which the companies described as a merger, each Tween share would be exchanged for 0.47 shares of Dress Barn stock. Dress Barn would pay down Tween’s $165 million bank debt and assume its other liabilities and assets. After the transaction, Tween shareholders would own about 16 percent of Dress Barn. Mike Rayden, Tween’s chairman and ceo, would continue to lead the business as a subsidiary of Dress Barn and report to Jaffe.

Both stocks shot up Thursday, with Tween ahead 28 percent to $6.63 and Dress Barn up 8.8 percent to $14.41.

“Mike and I are excited about this not because we happen to be the rich uncle that can come by and help them out with their debt,” Jaffe said. “It’s the opportunity to make us a stronger, larger, smarter company than we could be alone.”

Howard Tubin, an equity analyst at RBC Capital Markets, said the deal was probably a good one for Tween, which he covers, because it solves the firm’s balance sheet problems. He was more skeptical of the benefits for Dress Barn.

“You’re taking on a lot of leases and a lot of stores in a concept that has been underperforming and is in the midst of a pretty significant transition,” he said.

In August, Tween began converting 560 higher-priced Limited Too stores to the Justice nameplate, a changeover that is nearly complete. Just under 500 of the former Limited Too stores are in malls.

“It’s not just a little tuck-in acquisition,” Tubin said. “It’s not just a simple turnaround story. It’s harder.”

The challenge is certain to become more difficult with Aéropostale Inc.’s entry into the tween niche with the introduction of P.S., aimed at seven- to 12-year-olds. The New York-based firm believes P.S. could develop into “at least 500” units, Julian Geiger, chairman and ceo, said in a recent interview.

Together, Dress Barn and Tween have generated $2.4 billion in sales at 2,465 stores over the last year. After the deal is complete, Dress Barn is expected to still have more than $200 million in cash and investments. Dress Barn said the deal would not impact its bottom line in the first full year and be accretive thereafter.

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