The prospects for a marriage of men’s wear retail giants improved perceptibly on Tuesday.
With just two days remaining before Jos. A. Bank Clothiers Inc.’s offer to buy the larger Men’s Wearhouse Inc. is set to expire, Ricky Sandler, chief executive officer of MW’s largest shareholder, Eminence Capital LLC, said that he’d received “assurances” from MW ceo Douglas Ewert that the firm would review “all strategic options available to the company, including a significant return of capital to shareholders and a merger with Jos. A Bank Clothiers Inc.”
In a letter sent to Ewert on Tuesday and immediately made public by Eminence, Sandler wrote, “We also expect you and the board, given the explicit commitment to explore all options, to actively engage with [Bank] before their deadline of Nov. 14, 2013.” Their conversation took place on Monday, according to the letter.
MW had previously shot down Jos. A. Bank’s $48 a share, or $2.4 billion, offer, saying it undervalued the company. The transaction would include a $250 million capital infusion from Golden Gate Capital.
The prospects for a deal shifted last Thursday when Eminence, a New York-based hedge fund that also owns a small stake in Bank, reported that it had acquired a stake of 4.7 million shares, or 9.8 percent, in MW, the nation’s largest men’s specialty retailer. Although Sandler agreed with MW’s conclusion that the $48 offer was too low, he made it clear that a deal should be discussed.
“As fiduciaries for the shareholders, the board [of MW] has an obligation to pursue a path for MW that is in the best interest of those shareholders,” Sandler wrote last week in a letter to the board. “In our view, the board’s actions to date with respect to this matter fail to fulfill that obligation.”
He added that “acquirers rarely put forth their best price in their first offer.”
Men’s Wearhouse has a large edge in revenues — its 2012 sales were $2.49 billion to Bank’s $1.05 billion — while Bank’s more vertical business model gives it a substantial lead in gross margin. Both operations have dealt with margin pressures in recent seasons, but Bank ended last year with a gross margin of 58.3 percent of sales compared with 44.5 percent at MW.
Bank said late last month that it would consider raising the bid price if it had the opportunity to conduct “limited due diligence,” involving selective amounts of nonpublic information, with Bank officials submitting to nondisclosure agreements to insure confidentiality. MW had earlier expressed concern about Bank executives or their surrogates going through its books if it were to conduct due diligence and it adopted a poison-pill shareholder rights plan on Oct. 9, the same day it publicly rejected Bank’s offer.
Bank was open to a higher price, but not a longer process. It said it would stick by its Nov. 14 deadline and not pursue a hostile takeover in the event that the deadline passed without progress.
Ewert and other officials at MW didn’t respond to requests for comment on Tuesday.
Gilbert Harrison, chairman of Financo Inc., which is advising Bank on the deal, took the letter as an encouraging sign. “We’re were pleased to see the dialogue between the company and its largest shareholder and hope that now [MW will] be in a position to meet with us to discuss going forward.”
He said that Men’s Wearhouse had made no overtures in Bank’s direction since the receipt of Sandler’s letter.
The exchange came as Bank reported that it expects improved third-quarter earnings, with flat same-store sales and net sales up in the midsingle digits, when it reports quarterly financial results on Dec. 5.
Combined with the improved possibility of a deal for MW, the news sent shares of Bank up $1.70, or 3.5 percent, to $50.26, the strongest percentage gain among the retail stocks tracked by WWD. MW shares weren’t far behind, advancing $1.12, or 2.4 percent, to $47.08.
The hopeful tone of Sandler’s most recent letter notwithstanding, relations could be strained if Eminence doesn’t see openness to negotiate on MW’s part. The Eminence ceo closed his letter by saying he and other shareholders in MW “look forward to a public progress report in the coming days.”
If dissatisfied with the tenure or outcome of any talks, Eminence could pursue a proxy battle.
“The ramifications could be serious,” one source said.