Wall Street at least believes a Sycamore Partners purchase of Express Inc. is going to happen.
Shares of Express Inc. spiked 21.4 percent in Big Board trading Friday following the disclosure Thursday that private equity firm Sycamore is targeting the teen retailer for an acquisition. The stock closed Friday at $16.45, with over 11.3 million shares changing hands compared with a three-month average daily volume of 2.1 million. At Friday’s close, Express had a market capitalization of $1.38 billion.
Wall Street was in favor of the acquisition. CL King & Associates’ Steven Marotta said that given the seriousness of the letter to Express’ board, “we believe the likelihood of an ultimate deal is significantly better than 50-50.”
FBR’s Susan Anderson said, “We think the acquisition has a good probability of moving forward. Given continued weakness — assortment, promo environment, difficult teen-young adult landscape — and lack of clarity on a turnaround, shareholders are likely to view a takeout as an option that maximizes value.”
Sycamore said in a Securities and Exchange Commission filing Thursday revealing its 9.9 percent stake in Express that an offer could come as soon as 30 days after it receives approval to conduct due diligence.
Brean Capital’s Eric Beder believes that a transaction will occur, and said that one could be completed by yearend. He also raised the possibility that other private equity players might become involved. “We believe the odds of a deal occurring, whether it is Sycamore or another private equity player, are 90 percent,” Beder said.
Ratings agency Standard & Poor’s said that its “BB” corporate credit rating and stable outlook on Express are not immediately affected by Sycamore’s possible interest in the retailer.
Sycamore’s principals are familiar with the operations and management team at Express. Stefan Kaluzny and Peter Morrow were originally at Golden Gate Capital before leaving to form Sycamore. While at Golden Gate, the private equity firm acquired a stake in Express from Limited Brands, and then took it public. Both Golden Gate and Limited have since sold their remaining stakes in Express.
Sycamore said in its SEC filing that it paid $106.2 million to acquire 8.3 million shares of Express common stock, or a 9.9 percent stake, and that it sent a letter to Express’ board Thursday requesting due diligence so it could properly value the company for a possible binding offer for the shares it doesn’t already own.
Express has confirmed receipt of the letter and said a special committee of the board was formed to evaluate the request. It also said it adopted a stockholder rights plan, which prevents anyone from owning more than 10 percent of the stock without board approval.
Express last month said first-quarter profits fell 83 percent to $5.5 million, or 6 cents a share, from $32.5 million, or 38 cents, a year ago. Sales for the three months ended May 3 slipped 9.6 percent to $460.7 million as comparable-store sales fell 11 percent.
The company projected a second-quarter bottom line range of a loss of $2.5 million to profits of $2.5 million.
Express chairman and chief executive officer Michael Weiss said during a conference call then to Wall Street that second-quarter results will be “impacted by the need to move through slow-selling spring inventory and a Memorial Day event that did not drive traffic as successfully as last year.”
He also said that the chain would shutter about 50 of its more than 600 doors over the next three years, mostly through lease expirations.
Express is part of the teen retail sector that has been pressured in the past couple of quarters by macroeconomic factors that resulted in fewer spending dollars as teen unemployment has climbed north of 20 percent.