Traders aren’t buying what Men’s Wearhouse Inc. (MW) is selling.
Men’s Wearhouse rebuffed a $48-a-share offer from rival Jos. A. Bank Clothiers Inc. (JOSB) and refused to let it conduct due diligence that could have led to a higher bid. Even though the deadline to hold talks lapsed this month, the stock is still 33 percent higher than it was before the proposed deal was made public in October.
While a takeover target’s stock price often collapses after a buyer terminates its bid, Mizuho Securities USA Inc. says Men’s Wearhouse has held up because some investors are still betting on a takeover. Eminence Capital LLC, the biggest shareholder, is pushing for a special meeting so investors can vote to change the bylaws and overhaul the board. Eminence wants the company to sell to Jos. A. Bank because it sees the transaction creating $2 billion of value. At the very least, pressuring the board may lead to more stock buybacks, limiting the downside in the absence of a deal, MKM Partners LLC said.
“The stock is still up a long ways from its original level,” Keith Moore, an event-driven strategist at Stamford, Connecticut-based MKM, said in a phone interview. “It’s holding up because Eminence has a rather strong case, and I don’t think Eminence is going away.”
Ken Dennard, a spokesman for Houston-based Men’s Wearhouse who works for Dennard-Lascar Associates LLC, didn’t immediately respond to a phone call or e-mail requesting comment.
Jos. A. Bank said it first approached the board of Men’s Wearhouse with the $48-a-share offer on Sept. 18, and it publicly confirmed the proposal Oct. 9. That day, Men’s Wearhouse rejected the bid, calling it inadequate, and implemented a poison pill to thwart a hostile takeover.
The offer came three months after Men’s Wearhouse ousted its founder George Zimmer over disagreements he had with the board. The bid valued the men’s clothing chain at a 40 percent premium to its average price in the 20 days leading up to Oct. 9, or about $2.3 billion, according to data compiled by Bloomberg. Jos. A. Bank said it might consider increasing the price if it could see Men’s Wearhouse’s books, and gave the company until Nov. 14 to entertain deal discussions.
“If, in the future, we are invited by the Men’s Wearhouse board to discuss our acquisition of Men’s Wearhouse, or if circumstances were otherwise to change, Jos. A. Bank may consider whether a new proposal to acquire Men’s Wearhouse is warranted,” Jos. A. Bank Chairman Robert Wildrick wrote in a letter Nov. 15. Tom Davies, a spokesman for Hampstead, Maryland-based Jos. A. Bank who works for Kekst & Co., declined to comment on Eminence’s actions.
By allowing the deadline to expire, “the board has confirmed that it is not committed to exercising its basic fiduciary duties,” Eminence, the New York-based hedge fund (QEAAX) that has a 9.8 percent stake in Men’s Wearhouse, wrote in a Nov. 15 press release. The shareholder also said it’s seeking to hold a special meeting on Feb. 14 so that investors can vote to change certain bylaws, permitting them to remove directors without cause before the company’s next annual meeting, which will be later in 2014.
So far, traders are betting that Eminence will be successful. The stock closed at $46.78 yesterday, compared with $35.24 before Jos. A. Bank’s offer was disclosed.
Today, Men’s Wearhouse shares rose 2 cents to $46.80.
“The stock has remained relatively strong in the hope that there could be a deal at the end of the road,” Betty Chen, a San Francisco-based analyst at Mizuho, said in a phone interview. “Eminence Capital is trying to have some say over the board seats and replace them with ones that are perhaps more sympathetic towards Eminence’s point of view and persuade them to do a deal.”
It’s not an easy task, Chen said. The law in Texas, where Men’s Wearhouse is based, says that a special meeting can be called by holders of at least 10 percent of the stock, according to Eminence’s Nov. 15 statement. The poison pill prevents the firm from boosting its stake to that level, so it needs to rally support from other shareholders.
“The board has put up a number of obstacles, and it’s become a very defensive battle,” James Post, a corporate governance and ethics professor at Boston University School of Management, said in a phone interview. “Eminence has to try to create a coalition of shareholders that’s big enough to force the board to pay attention and not simply reject the demands out of hand.”
A representative for Eminence declined to comment on the challenges it may face, referring instead to Men’s Wearhouse’s bylaws. According to company filings, shareholders representing two-thirds of the stock are needed to vote for amendments to the bylaws, while a plurality of votes is needed to elect new directors at the company’s annual meeting.
Investors’ downside is limited by the potential for share buybacks, which the board of Men’s Wearhouse may feel pressured to do to keep the stock price up in the absence of a deal, MKM’s Moore said. The board approved a $200 million share-repurchase plan in March, of which $152 million has been used.
“There’s no way a buyback can compete with the value you create with a merger,” Ricky Sandler, chief executive officer of Eminence, said in phone interview earlier this week. He said he also would be “very happy” with Men’s Wearhouse buying the smaller Jos. A. Bank.
It’s going to take “quite a few months” for Eminence’s efforts to play out, MKM’s Moore said. Some investors may not be willing to wait that long.
Thomas Kirchner, manager of the Quaker Event Arbitrage Fund in Malvern, Pennsylvania, said he sold out of Men’s Wearhouse because it’s shaping up to be a “drawn-out saga.”
“We prefer situations where we are on a clear path to a resolution,” Kirchner said in a phone interview. “This is something where you now have a war going on, and generally that’s not a good situation for investors. Management is distracted by having to fight the activist and meeting with advisers and lawyers, rather than taking care of the business.”
The better approach would have been for Men’s Wearhouse to put itself up for sale and see if it received a more attractive offer, and if it didn’t, it could remain a standalone, he said.
It’s not imperative for Men’s Wearhouse to combine with another company, in part because it has a solid balance sheet and is able to generate cash flow to support growth on its own, Chen of Mizuho said.
Even so, Eminence, which says it also owns 1.4 million Jos. A. Bank shares, argues that the two companies would be better together. The firm estimates $75 million to $125 million of costs could be cut by combining the retailers, and that $175 million to $390 million of so-called synergies could be achieved from being able to cross-sell brands and products such as tuxedos.
Together, they’d have a market value of $4.88 billion, according to Eminence’s analysis. That’s about $2 billion more than the sum of their market values before the proposal was made public and $1.2 billion more than yesterday.
While it’s unlikely that Men’s Wearhouse and Jos. A. Bank negotiate a friendly deal, it can’t be ruled out, according to Richard Jaffe, a New York-based analyst at Stifel Financial Corp. The company needs to determine whether its long-term goals as a standalone company will lead to a higher price than what Jos. A. Bank is willing to pay now, he said.
“The board is between a rock and a hard place,” Jaffe said in a phone interview. “They probably recognize the merit to management’s long-term outlook for the company because there are a lot of really good things percolating, but also recognize their responsibility to shareholders to provide the best value on a very time-sensitive basis.”