Sears, Urban Outfitters Said to Weigh J. Crew Bids

Sears Holdings Corp. and Urban Outfitters Inc. are weighing rival bids for clothing retailer J. Crew Group Inc. in a potential challenge to TPG Capital and Leonard Green & Partners LP’s $3 billion buyout, said three people with knowledge of the matter.

Sears and Urban Outfitters are studying J. Crew’s books, said the people, who asked not to be identified because the matter is private. Neither company has indicated whether it will actually counter TPG and Leonard Green’s $43.50-per-share offer, the people said.

Sears buying the clothing chain “would be great for Sears, but horrible for J. Crew,” said Christine Chen, a San Francisco-based analyst for Needham & Co. “J. Crew is positioned as aspirational and Sears is not. It would have a negative impact on the J. Crew brand.”

A J. Crew-Urban Outfitters tie-up would make less sense because the two companies have overlapping customers and J. Crew’s sales are growing more slowly, said Chen, who recommends holding J. Crew shares and buying Urban Outfitters.

At least two other private-equity firms are also receiving confidential data on the New York-based retailer, said the people. J. Crew’s go-shop period, in which a public company solicits competing offers, expires Jan. 15 so any bid must be made before then. TPG and Leonard Green’s Nov. 23 offer for the company was 29 percent higher than J. Crew’s average closing share price in the month prior to the announcement.

Lawsuits

A rival offer may validate J. Crew’s strategy of depending on the go-shop period to solicit competing bids, rather than conducting an auction before signing the agreement with the buyout firms. The company faces more than a dozen lawsuits from shareholders questioning whether J. Crew Chief Executive Officer Millard Drexler is getting a fair price for the acquisition.

J. Crew climbed 98 cents, or 2.3 percent, to $44.04 at 4:01 p.m. in New York Stock Exchange composite trading for the largest since TPG and Leonard Green’s November bid. Sears advanced 89 cents, or 1.3 percent, to $72.35 on the Nasdaq Stock Market, while Urban Outfitters fell 14 cents to $35.75.

TPG previously owned J. Crew, and hired Drexler in 2003 to run it. He plans to stay CEO if the buyout firm takes it private again.

A spokeswoman for Urban Outfitters didn’t respond to a request for comment. A spokeswoman for J. Crew and a spokesman for Sears declined to comment.

Go-Shop Period

Under the agreement with the private-equity firms, J. Crew must pay TPG and Leonard Green $27 million if it accepts a higher offer. The fee, representing about 1 percent of the purchase price, is lower than the typical fee. Sometimes rival companies use a go-shop period to learn more about a competitor and have no intention of bidding. Most go-shop periods don’t result in a rival bid.

Sears, owner of the Sears and Kmart chains, has sought to lure customers back to stores to reverse three straight years of declining sales. Chairman and majority shareholder Edward Lampert faces mounting competition from discounting rivals such as Costco Wholesale Corp. and Wal-Mart Stores Inc.

On Jan. 4, Sears named Lana Cain Krauter, formerly of Bealls Department Stores Inc. and J.C. Penney Co., as president of its apparel business. The company’s apparel brands include Lands’ End, Jaclyn Smith and Joe Boxer.

Eight Brands

Urban Outfitters has a wholesale apparel division and retail operations, whose lines include its namesake brand and Anthropologie. Urban may grow to as many as eight brands within 10 years by acquisition or developing its own, CEO Glen Senk said at an investor conference in November. The retailer has made one acquisition in its history, buying J. Franklin Styer Nurseries Inc. for $24.3 million in 2008 to expand into gardening products.

Senk could make a marriage with J. Crew work because he lets brands operate autonomously, said Edward Yruma, a New York- based analyst for Keybanc Capital Markets who recommends holding Urban shares.

“If any strategic would have a chance of making it work it would be him,” Yruma said. “Historically, they’ve done things organically and I’d be surprised if they did this.”

TPG’s offer for J. Crew was the largest in the retail apparel industry last year, according to data compiled by Bloomberg. The retailer has about 250 stores, which include the J. Crew and Madewell clothing lines.

Retail Deals

Last year, there were 77 announced deals in the retail apparel industry globally, according to data compiled by Bloomberg. In the nine deals where data is available, bidders paid a median of 9 times earnings before interest, taxes, depreciation and amortization. TPG and Leonard Green’s proposed offer for J. Crew implies a multiple of 8.1.

TPG and Leonard Green had negotiated the initial transaction with the support of J. Crew CEO Drexler. At least two other parties made overtures to J. Crew before the TPG announcement, according to regulatory filings from Dec. 6 related to the offer.

Drexler waited more than a month after a Sept. 1 dinner with TPG co-founder and J. Crew director James Coulter before notifying the full board about Coulter’s takeover proposal, according to the filing. He later told a committee of independent directors charged with handling the negotiations that he has a “high comfort level” with TPG and had “significant reservations about the prospect of working for a new boss,” according to the filing.

Coulter’s Role

Coulter has also been singled out in shareholder lawsuits. He was aware of TPG’s interest in acquiring J. Crew and didn’t tell fellow board members for several weeks, according to the filing. Several days after informing Drexler of TPG’s interest, Coulter’s assistant called to get board materials for him on Sept. 10, the filing showed.

TPG’s ties to the retailer extend back more than a dozen years, when the Fort Worth, Texas-based private-equity firm acquired an 88 percent stake. Drexler took over in 2003, and the retailer held an initial public offering three years later.

To contact the reporters on this story: Jeffrey McCracken in New York at jmccracken3@bloomberg.net; Zachary R. Mider in New York at zmider1@bloomberg.net.

To contact the editors responsible for this story: Robin Ajello at rajello@bloomberg.net; Jennifer Sondag at jsondag@bloomberg.net.

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