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Eminence Capital Speaks Out Against Eddie Bauer Deal

A letter sent to the Jos. A. Bank board indicates that the hedge fund intends to fight Bank's acquisition.

Eminence Capital isn’t backing down.

This story first appeared in the February 19, 2014 issue of WWD.  Subscribe Today.

The hedge fund on Monday sent a letter to the board of Jos. A. Bank Clothiers Inc. stating that the planned acquisition of Eddie Bauer “defies industrial logic” and is a “poor strategic decision.”

The fund’s letter also said the acquisition of Eddie Bauer confirms its suspicions about the Jos. A. Bank board and management wanting to protect their jobs, a position Eminence took in its lawsuit filed earlier this year in a Delaware Chancery Court to block Jos. A. Bank’s proposed deal to buy Eddie Bauer.

Eminence also disputed the synergies that Jos. A. Bank said were existing regarding the merger with Eddie Bauer, and noted that the $50 million break-up fee should Jos. A. Bank receive a better offer destroys shareholder value instead of maximizing it since that’s “money that might directly come out of shareholders’ pockets.”

Eminence, which is a shareholder of Jos. A. Bank and Men’s Wearhouse, prefers a merger of the two men’s retailers. As for Eddie Bauer, it said in its letter to the Jos. A. Bank board that the acquisition defies logic because there is minimal product or customer overlap, noting that more than 40 percent of Eddie Bauer’s sales are to women and “virtually all of its products are outside of Jos. A. Bank’s core men’s tailored clothing segment.”

The letter also said an agreement to purchase an unrelated business such as Eddie Bauer demonstrates the Jos. A. Bank board’s disregard for its main role as stewards for shareholders in maximizing value. “In our view these decisions defy any sense of sound business judgment,” the letter noted.

The hedge fund put the Jos. A. Bank board on notice in the last paragraph in its letter: “Make no mistake about it — we intend to hold the board accountable for its actions both through the upcoming proxy vote and through direct actions in court.”

Avondale Partners analyst Mark Montagna also criticized the Jos. A. Bank board. “None of [Jos. A. Bank’s] senior executives or board members has relevant experience with acquisitions and the subsequent integration. In fact, the board (beyond [chairman] Robert Wildrick and [chief executive officer] Neal Black) is the weakest of any board for stocks we have under coverage.

“We have researched the backgrounds of board members and the companies represented in their proxy profiles and are unable to locate any discernible addresses or phone numbers that work. Such a weak board raises execution risk to an even higher level since such key advisers are not available. We believe Jos. A. Bank needs to upgrade the quality of its board with advisers that can contribute to unlocking Eddie Bauer’s potential,” Montagna said.

Stifel analyst Richard Jaffe, noting that the Jos. A. Bank acquisition of Eddie Bauer had made the tug-of-war between the two men’s wear firms “more complicated,” said Men’s Wearhouse could raise its current offer for Jos. A. Bank to “perhaps $65” a share from its current level of $57.50, and allow Jos. A. Bank’s shareholders to choose between an offer from Men’s Wearhouse, “a highly synergistic buyer with a likely all-cash offer, by our estimation, versus [Jos. A. Bank’s] acquisition of an unrelated business in turnaround mode with significant debt anticipated to be incurred.”

An offer of $65 a share would constitute a multiple of enterprise value to earnings before interest, taxes, depreciation and amortization of 10 times. Recent transactions in the specialty apparel sector have averaged about nine times EBITDA, Jaffe said.

Jos. A. Bank officials declined comment.