The Talbots Inc. relieved itself of a major drain on its earnings and attention on Monday by agreeing to sell its J. Jill brand to Jill Acquisition, an affiliate of private equity firm Golden Gate Capital, for $75 million.
Talbots said in November that J. Jill was up for sale. The purchase price is about one-seventh the $517 million Talbots spent in 2006 for the brand, when it beat out Liz Claiborne Inc. in a bidding war.
J. Jill posted an operating loss of $76 million in 2008, wrote Todd Slater, analyst at Lazard Capital Markets, in a research note.
Trudy F. Sullivan, Talbots president and chief executive officer, said the transaction will “close in the current second quarter.”
According to Talbots, J. Jill will continue to be led by Paula Bennett, the brand’s president.
J. Jill operates 279 stores under lease arrangements. Of these, 204 will be assigned to Jill Acquisition and will continue to operate. The remaining 75 store leases will be retained by Talbots and the units are expected to close within 60 days.
According to Stifel Nicolaus analyst Richard Jaffe, Talbots will have to “negotiate lease settlements with landlords, which could be a costly endeavor as the chain’s average initial lease term is 10 years.” Even at an estimated average remaining lease term of five years at $63 a square foot, the 75 sites could cost Talbots $75 million, the same as the purchase price.
Jaffe also noted Talbots will record a liability relating to contingent obligations pertaining to the leases assigned to Jill Acquisition, since the lease liabilities revert to Talbots should “Golden Gate fail in its efforts to turn around J. Jill and be forced to declare bankruptcy.”
Slater, who last week said a sale of J. Jill “could occur sooner rather than later,” said in his note the price was $59 million more than the amount Talbots carried on its books for the brand. “Even after assuming costs to liquidate 75 remaining stores, we believe Talbots came out well ahead of what the Street could possibly have expected,” he wrote.
Sullivan pointed out, “This is a significant strategic step forward for Talbots as it enables us to focus our time, resources and attention exclusively on rejuvenating our core Talbots brand and return to profitable growth.”
She noted in a telephone interview there were other bidders interested in J. Jill, but that Golden Gate has the “resources that can help J. Jill develop their brand.”
She explained the division of stores between her firm and Golden Gate was based on the productivity of individual stores. Sullivan also said Talbots had no need for the 75 locations being retained because there are already Talbots stores in the same malls.
The sale adds additional muscle to Golden Gate’s portfolio of retail operations, which has grown steadily over the last five years. The stable of brands under the Golden Gate umbrella includes Blair, acquired in 2007; Haband and Norm Thompson, acquired in 2006; Appleseed’s and Draper’s & Damon’s, acquired in 2005, and Spiegel and Newport News, acquired in 2004 following Spiegel Group’s bankruptcy.
Golden Gate officials declined comment Monday.
Talbots is scheduled to report its first-quarter operating results today.
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