The Men’s Wearhouse Inc. just won’t give up on Jos. A. Bank Clothiers Inc. — and is now willing to pay up to $1.8 billion for it.
This story first appeared in the February 25, 2014 issue of WWD. Subscribe Today.
On Monday morning, the California-based retailer increased its cash tender offer for its archrival to $63.50 a share, from $57.50, and said it was prepared to boost its bid to $65 a share if Jos. A. Bank agrees to terminate its agreement to acquire Eddie Bauer.
Men’s Wearhouse put greater pressure on Jos. A. Bank to do a deal by moving up the expiration date of its offer by more than two weeks to March 12 from March 28.
At $57.50, the deal would have cost Men’s Wearhouse $1.61 billion. Now, at $63.50, it’s a $1.78 billion deal. And at $65, it’s a $1.82 billion one.
It’s a high price, particularly for two companies in what is essentially a mature market — the moderately priced men’s tailored clothing business. Men’s Wearhouse operates more than 1,100 stores under the Men’s Wearhouse, Moores and K&G names, while Jos. A. Bank has more than 600 units.
Nevertheless, Wall Street believes the combination of the two companies holds opportunities for growth and showed its approval Monday by sending up the stock prices of both companies. Shares of Men’s Wearhouse rose 7.5 percent to close at $48.51 in trading on the New York Stock Exchange, while Jos. A. Bank shares jumped 9.1 percent to $60.04 in Nasdaq trading. The uptick in the stock prices seems to indicate a wager by Wall Street that a deal will take place.
Eminence Capital LLC, which owns 4.9 percent of the common stock of Jos. A. Bank and just under 10 percent of Men’s Wearhouse, was quick to throw its support behind the increased offer price. “We are extremely pleased that Men’s Wearhouse has made a full and fair offer for Jos. A. Bank,” said Ricky C. Sandler, chief executive officer of Eminence.
“We have maintained all along that the combination of these two great companies is the best outcome for all shareholders. We believe this offer clearly represents a superior alternative for Jos. A. Bank shareholders compared to remaining independent and acquiring Eddie Bauer. If the board of Jos. A. Bank properly fulfills its fiduciary duty, we expect it will come to the conclusion that it should accept this offer to merge with Men’s Wearhouse and move ahead with the limited confirmatory due diligence requested by Men’s Wearhouse to solidify the $65 per share offer price.”
Eminence on Monday sent a letter to the board of Jos. A. Bank stating that the planned acquisition of Eddie Bauer “defies industrial logic” and is a “poor strategic decision.” The hedge fund also said the acquisition 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 the deal.
On Monday, Men’s Wearhouse filed its own suit against the directors of Jos. A. Bank, Golden Gate Private Equity, Everest Topco LLC and Everest Holdings LLC alleging that the board has breached its fiduciary duties by adopting a series of “unreasonable, shareholder unfriendly and illegal defensive measures designated to thwart the Men’s Wearhouse tender offer, prevent a change of control, pack the board with allies, interfere with the upcoming vote for two directors, and entrench the existing board.”
Although Jos. A. Bank has called out what it believes are synergies between itself and Eddie Bauer — advantages that include fabric sourcing, back-office savings, international offices, etc. — Eminence disputed the synergies, 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.”
Responding to Men’s Wearhouse’s increased bid, Jos. A. Bank said its board will “review all aspects of the revised, unsolicited tender offer for the company…and will make a recommendation to stockholders in due course.” It advised its shareholders to “take no action” until the board has weighed in with its recommendation.
Richard Jaffe, analyst at Stifel Nicolaus & Co., called the latest offer “attractive and very substantial.” He noted that both companies have said they expect $100 million to $150 million in consolidated savings when a merger is completed, a figure that will have a “really material impact on EPS [earnings per share] quickly.” He said that if the savings in the first year amounted to $42 million, “it will be nicely accretive in the first year, even at that price.”
Mark Montagna, a retail analyst at Avondale Partners, believes the acquisition now has a better chance of going through. “Certainly the odds of getting a deal done have gone up with Men’s Wearhouse increasing its offer,” he said.
He described the new Men’s Wearhouse offer as a “fair price.” At $63.50 a share, it is 10 times Jos. A. Bank’s fiscal 2013 earnings before interest, taxes, depreciation and amortization.
Though both publicly held firms are mature chains, Montagna sees “plenty of room for operating margin growth going forward” from back-office synergies, manufacturing and advertising.
While the analyst has been critical of the planned Jos. A. Bank-Eddie Bauer merger, he noted that one huge question remains: whether Men’s Wearhouse will be able to block the Eddie Bauer acquisition through its lawsuit in a Delaware state court. Jos. A. Bank on Feb. 13 entered into a definitive agreement to acquire Everest Holdings LLC, parent company of Eddie Bauer, for $825 million.
Jaffe isn’t a fan of the Eddie Bauer deal either, questioning whether Jos. A. Bank would be successful in improving the performance at the long-struggling specialty-store business. Based on Eddie Bauer’s “lack of profitability” and Jos. A. Bank’s “erosion of profit, the prudent decision would be to take the $63.50,” he believes.
While many see a combination of Men’s Wearhouse and Jos. A. Bank as a sensible move in market-share terms, if the deal comes to pass it might be a tough fit for the people involved.
“There are cultural and stylistic issues that would make this a very challenging business marriage,” said Les Berglass, founder and chairman of executive search firm Berglass + Associates. “I find Jos. A. Bank an incredibly traditional company in its approach to the business and the Men’s Wearhouse guys are entrepreneurial, gut marketers.”
Monday’s $63.50 price represents a 60 percent premium over Jos. A. Bank’s unaffected enterprise value and a 52 percent premium over its closing share price on Oct. 8, the day before Jos. A. Bank went public with its offer to acquire Men’s Wearhouse. In addition, the transaction represents a 9.7 times enterprise value to the last 12 months’ adjusted EBITDA, assuming an estimated $137 million of adjusted EBITDA for Jos. A. Bank’s fiscal 2013 ended Feb. 1.
Doug Ewert, president and ceo of Men’s Wearhouse, said Monday that his company’s latest proposal to acquire Jos. A. Bank “creates significant value for shareholders of both companies. Our increased cash offer would provide Jos. A. Bank shareholders with a substantial premium and immediate and certain value, and we are prepared to further increase our offer price on the basis of limited due diligence. Moreover, as part of those negotiations, we would be willing to discuss offering Jos. A. Bank shareholders the opportunity to participate in the upside of a combination through an election to receive Men’s Wearhouse stock for a portion of the consideration we are offering.”
He urged the board to “take the responsible step for Jos. A. Bank shareholders and promptly terminate the Eddie Bauer agreement. We are confident that a transaction with Men’s Wearhouse will create greater value for Jos. A. Bank shareholders than the Eddie Bauer transaction.”