NEW YORK — J. Crew Group Inc. thinks it’s a chain in trouble.
This story first appeared in the February 24, 2011 issue of WWD. Subscribe Today.
In a rare fit of self-flagellation for a public company, J. Crew has gone out of its way to highlight its financial and operational weaknesses in an effort to justify the pending $3 billion takeover by TPG Capital and Leonard Green & Partners. Shareholders will vote on the deal on Tuesday.
In a presentation to investors Wednesday, J. Crew called attention to its “disappointing” profit guidance, underlined declining same-store sales and warned of longer-term challenges.
J. Crew, which has had nothing but a sterling track record under the stewardship of chairman and chief executive officer Millard “Mickey” Drexler, noted that as a stand-alone operation its “deteriorating operating performance impacts [the] valuation” of its business and that there are “overall execution risks associated with implementation” of its strategic plan.
The company is essentially arguing that it sold out at the right time for shareholders considering its business was weaker than generally appreciated when the buyout was negotiated in November.
The purchase price of $43.50 a share represents a premium of 15.5 percent over the stock’s close Nov. 22, the day before the deal was made public. But J. Crew said that’s not the full story, given that it was just about to cut its annual profit guidance. Lower guidance for the year would have hurt the stock price, making the offer of $43.50 a share look even better.
“Some people are always going to think the price is a little bit too low and some people are always going to think the price is a little bit too high, but that’s what makes markets,” said Paul Lejuez, an analyst at Nomura Securities. “The fact that no other bidder came along tells me that the price was kind of right.”
Considering the market’s likely reaction to the company’s prospects, Lejuez said the purchase price of $43.50 looks more like a 30 percent premium.
Not everyone sees it that way, especially those who take umbrage with Drexler’s early handling of the deal. The ceo, who is set to retain an equity stake in the company after the buyout, began talking to the private equity firms about a potential deal nearly seven weeks before presenting it to his board.
This month, Michael Martino, managing member of Mason Capital Management, which owns about 4.2 million J. Crew shares, or 6.5 percent of those outstanding, said his firm would not vote in favor of the deal at the current price.
“Like most public shareholders of J. Crew, we are angered and troubled by the board’s dereliction of its duties in the face of an insider deal struck by your chief executive officer and his private equity backers,” Martino said in a letter to the retailer’s board.
On Monday, investor advisory firm Institutional Shareholder Services Inc. recommended shareholders vote against the deal. And shareholders have sued the company in Delaware Chancery Court, which led to a $10 million settlement that the shareholders have since tried to scuttle.
The lawsuits and scrutiny are the kind of uncomfortable and very public situation management teams take companies private to avoid.
Shares of J. Crew Wednesday closed at $43.34, down less than 0.1 percent, as the S&P Retail Index slid 1.8 percent to 506.27 on concerns about turmoil in Libya.
But even if the deal has had more than its share of melodrama, analysts expect the story will end where it began, with J. Crew being taken private by TPG and Leonard Green.
“If shareholders were to vote against the deal, I think the shares are going to sell off,” said Christine Chen, an analyst at Needham & Co. “The question really is: Do you think things are going to get dramatically better in 2011 so that the stock could rebound?”