J. Crew Agrees to Be Purchased by TPG, Leonard Green for About $3 Billion
J. Crew Group Inc. agreed to be acquired by TPG Capital and Leonard Green & Partners in a transaction valued at about $3 billion, giving the buyout firms the New York-based retailer’s namesake and Madewell brands.
The price is $43.50 a share, 23 percent higher than the 20- day average stock price before today. That compares with the 17 percent average premium for U.S. private-equity takeovers of apparel makers, according to data compiled by Bloomberg.
TPG, a former owner of the retailer, and Leonard Green will work with Chief Executive Officer Millard “Mickey” Drexler, they said today in a statement. Drexler may be looking to go private as J. Crew adapts to changing consumers’ tastes and deals with inventory that isn’t selling well, said Nathan Brown, an analyst at J. Crew shareholder Waddell & Reed Financial Inc.
“You’ve got too much of the wrong stuff and the stuff is still coming in,” said the Overland Park, Kansas-based analyst, whose firm owned more than 760,000 shares as of Sept. 30. “Over the next couple of quarters, the results at J. Crew have the ability to be somewhat sloppy.”
The retailer lowered its full-year earnings forecast today for the second time this year. Continued discounting of women’s apparel that hasn’t sold well will decrease profit margins, Drexler said on a conference call. Profit will rise to as much as $2.13 a share, compared with a previous top end of $2.35. Full-year earnings in 2009 totaled $1.91 a share.
The clothier’s stock rose $6.26, or 17 percent, to $43.91 at 3:41 p.m. in New York Stock Exchange Composite trading after earlier being halted. J. Crew, whose clothing has been worn by first lady Michelle Obama, had dropped 16 percent this year before today.
The buyers are paying 8.1 times J. Crew’s earnings before interest, taxes, depreciation and amortization for the past four quarters, compared with the median multiple of 7.8 times in the past five years, according to Bloomberg data.
Sales at stores open at least a year fell 1 percent in the quarter ended Oct. 30, while net income sank 14 percent. Same- store sales may decline by low-single digits in the fourth quarter, the company said.
“While we work through this short-term hurdle, and we believe it is short-term, we remain focused on our long-term strategy and won’t compromise our products or customer service,” Drexler said.
Until now, J. Crew had weathered the economic turmoil in the U.S. better than some competitors. For the year ended January 2010, J. Crew posted a comparable-store sales increase of 4.1 percent, compared with declines of 18 percent for AnnTaylor Stores Corp. and 9 percent for Banana Republic North America, owned by Gap Inc.
J. Crew didn’t change its fashion fast enough as it kept tops over-embellished with ruffles and the fit of its jeans too tight, said Laura Champine, an analyst for Cowen & Co. in New York. She said she realized the company had a problem last month when it reduced prices on all sweaters by 20 percent.
“I don’t think there is anything broken here,” said Champine, who has an “outperform” rating on J. Crew shares. “A lot of LBOs you take them private and really change things and bring them back public once you fix them. This is the kind of thing that rights itself by next year.”
Perella Weinberg Partners LP provided financial advice to J. Crew’s special committee of directors examining the deal, while Cravath Swaine & Moore LLP gave legal counsel.
Cleary Gottlieb Steen & Hamilton LLP is acting as legal adviser to J. Crew. Goldman Sachs Group Inc. and Bank of America Merrill Lynch are giving financial advice to TPG and Leonard Green. Ropes & Gray LLP is giving legal counsel to TPG, and Latham & Watkins is doing the same for Leonard Green.
The special committee also will review any alternative bids through Jan. 15, according to today’s statement.
J. Crew reported sales of $1.58 billion in the year ended January, twice its revenue seven years ago, when Drexler took over. The company operates 250 retail stores under brands including Madewell and 85 factory outlet locations, as well as the catalog business.
The company began in 1983 after the mailing of the first catalog, and J. Crew later opened a store in New York, according to its website. The retailer debuted the Madewell line, aimed at women aged 18 to 40, in 2006.
The past five years have yielded more than 30 private- equity deals in the U.S. retail apparel industry, with an average premium of 14.8 percent. Buyout firm Bain Capital LLC agreed to pay a premium of 45.9 percent when it announced plans to buy children’s retailer Gymboree Corp. last month.
Since 2005, at least the top five retail apparel deals in the U.S. have been done by private-equity firms, led by the $2.8 billion acquisition of Claire’s Stores Inc. by Apollo Global Management LLC more than three years ago.
“We are going to see more consolidation in the retail industry, especially in developed markets where there’s a need to clear excess capacity,” Bob Parker, senior adviser at Credit Suisse Group AG, said today. “Strong growth in the future is going to come from emerging markets.”
TPG Capital previously acquired an 88 percent stake in J. Crew in 1997, according to data compiled by Bloomberg. The retailer held an initial public offering in 2006 after hiring former Gap CEO Drexler in 2003 to turn the company around.
Investors might not be so willing to approve a sale with Drexler’s history as a successful merchant at both Gap and J. Crew, Waddell’s Brown said.
“Private equity needs an exit strategy, so the minute the fashion gets good again are they going to come back to the market and sell it?,” Brown said. “Presumably they will want to sell it at a higher price, which for us as shareholders would be great if it’s taken out at 15 percent, but if it comes back at a 35 percent premium, we would have preferred to own it during that appreciation.”