By  on August 1, 2011

Shares of The Talbots Inc. jumped 17.6 percent Monday on the possibility of a buyout after investors learned private equity firm Sycamore Partners holds a 9.9 percent stake in the struggling women’s specialty chain.

In a regulatory filing with the Securities and Exchange Commission, Sycamore disclosed it spent $21.6 million to buy nearly 7 million shares, or 9.9 percent, of Talbots, either doing so directly or through entities that Sycamore controls. The purchases were made from June 6 at $2.51 a share through July 28 at $3.51 a share, the filing said.

Sycamore is now believed to be the second largest shareholder in Talbots after Oppenheimer Funds, which as of the first quarter ended March 31 owned a 13.3 percent of the retailer.

The filing said Sycamore believes Talbots’ stock is “undervalued and is an attractive investment.” In addition, Sycamore said in the filing that it expects to “engage in discussions with management, the board, other stockholders of the issuer” concerning the retailer’s business, assets, capitalization and other issues.

Neither executives at Talbots nor Sycamore could be reached for comment on Sycamore’s stake.

Disclosure of the stake prompted analyst Adrienne Tennant of Janney Capital Markets to raise her rating of Talbots to “neutral” from “sell.”

Shares of Talbots closed at $4.07, up 61 cents, in trading Monday on the New York Stock Exchange. The current market capitalization is shy of $300 million, the minimum of what a possible buyout investor would need to bid to take the retail chain private. Talbots’ shares have traded as high as $13.43 in the last 52 weeks.

Not much is known publicly about Sycamore. According to its Web site, the fund specializes in consumer and retail investments. “Our strategy is to partner with management teams to improve the operating profitability and strategic value of their businesses. We provide capital and expertise to enable companies to succeed,” the site said.

An executive at a financial services firm, who requested anonymity, said Sycamore is still in the middle of raising money for its fund. A source familiar with Sycamore’s effort said the first close so far netted close to $400 million, and that after final close is completed on commitments, Sycamore’s first fund is expected to have raised between $750 million and $1 billion.

Financial sources familiar with Sycamore’s investment approach said it is not an activist investor, but rather a private equity firm that specializes in buyouts of undervalued companies in turnaround situations. That’s inherent in the background of its co-founders, Stefan Kaluzny and Peter Morrow, who left private equity firm Golden Gate Capital at the beginning of the year to form Sycamore. Because of that background, the stake in Talbots makes sense, said a financial source familiar with the investment. The source explained that when others don’t see any upside to an investment, that’s when value investors see opportunity to “come in and make some real money.”

Sycamore is located at 9 West 57th Street in Manhattan. Kaluzny, who was managing director at Golden Gate, has had some dealings with Talbots before, having been involved with Golden Gate’s purchase of J. Jill Group from Talbots. His track record included Golden’s Gate’s purchase of Eddie Bauer and the Limited Stores division, as well as catalogue firm Norm Thompson and Golden Gate’s $150 million five-year senior secured loan to Zale Corp.

The investment comes at a time when there have been rumblings on the mergers and acquisitions front that financial firms and possibly one or two strategic companies have circled around Talbots wondering if the time is right to make a bid for the chain.

Talbots has been in an extended “turnaround mode” since mid-2007 following the arrival of Trudy Sullivan as president and chief executive officer. While the changes include store closures and the flowing of updated merchandise to attract a younger customer, consumers haven’t exactly been stepping up to the plate with their spending dollars.

In early June, after Talbots reported quarterly earnings, shares of the company tumbled more than 40 percent when its return to profitability in the first quarter was far overshadowed by large declines in sales and margins and a bleak outlook for the second quarter.

Sullivan told analysts in a conference call to Wall Street that the first-quarter performance reflected an “inconsistent customer response to our merchandise assortments” and said second-quarter conditions “will continue to be challenging.”

Sullivan, who was president of Liz Claiborne Inc., took over the helm from Arnold B. Zetcher, who had indicated in early 2007 that he would retire in early 2008.

For the first quarter ended April 30, income was $739,000, or 1 cent a diluted share, versus a loss of $4.4 million, or 8 cents, in the year-ago quarter. Sales fell 6 percent to $301.3 million from $320.7 million, as comparable-store sales declined 7.7 percent.

Talbots’ second-quarter earnings report is expected later this month.

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