It looks like J. Crew Group Inc.’s future might lead to Wall Street rather than Tokyo.
This story first appeared in the March 19, 2014 issue of WWD. Subscribe Today.
The private equity-owned fashion firm had been in very preliminary talks to be acquired by Fast Retailing Co. Ltd., but as WWD reported Friday, the Japanese giant balked at the $5 billion price tag being bandied around in the press. Numerous reports on Tuesday said the discussions had broken down entirely.
That appears to make a return to the public markets more likely for J. Crew, which is said to have been working on an initial public offering with Goldman Sachs. Such a move would also keep the pressure on chairman and chief executive officer Millard “Mickey” Drexler, who is very well regarded in investment circles and would have to grapple with high expectations for the offering.
J. Crew already files its financial results with the Securities and Exchange Commission because of its publicly held debt and could relatively easily put together the paperwork for an IPO. And now, the market’s been primed for a valuation that would be favorable for the company’s owners.
TPG and Leonard Green & Partners teamed with Drexler to take the company private for $3 billion in 2011. The investors have paid themselves some hefty dividends, including nearly $200 million in December 2012 and another $484 million following a bond offering in November.
The $5 billion price tag that was being talked about in a potential deal with Fast Retailing valued the retailer at about 13.5 times earnings before interest, taxes, depreciation and amortization. It was seen as a hefty price and one that only a strategic player like Fast Retailing, which could cut costs by combining operations, could afford. Fast Retailing could also use J. Crew’s expertise to expand Uniqlo in the U.S. while helping J. Crew step out internationally.
J. Crew’s earnings growth has been slowing, complicating a potential sale. Adjusted EBITDA rose 27.4 percent to $359.6 million in 2012, but rose about 2.9 percent to around $370 million last year.
Financial sources said word of the talks with Fast Retailing might have been leaked by J. Crew’s owners in an effort to move the deal along. If so, the tactic appears to have misfired since Fast Retailing was said to be unhappy that the discussions were made public.
But, although talks were reported to have broken down, Fast Retailing is not seen as entirely out of the picture.
The company’s chairman, president and ceo, Tadashi Yanai, is known as an admirer of Drexler with a history of perusing U.S. retailers, having said to have kicked the tires at Gap Inc., American Eagle Outfitters Inc. and Aéropostale Inc. over the years.
If J. Crew were to file paperwork for an IPO, that would put pressure — essentially the virtues of a deadline — on Fast Retailing and any other would-be suitor to make their move. It also would expose J. Crew’s investors to the vagaries of the public markets and a longer exit from their investment, since such investors would typically only sell a portion of their equity in the process.
This is a well-worn dance in the world of high finance.
Neiman Marcus’ owners, TPG and Warburg Pincus, were said to have been looking to exit their investment for some time, filed paperwork for a public offering and then turned around and sold to Ares Management and the Canada Pension Plan Investment Board for $6 billion, or 9.5 times EBITDA, in October.