Talbots Last Best Hope Seen in Sycamore’s Lowest Price: Real M&A

Shoppers Walk Past A Talbots Inc. Store
Talbots Inc. may struggle to get a competing offer to beat the one it has sitting on the table right now from Sycamore Partners LP. Photographer: Emile Wamsteker/Bloomberg

Talbots Inc. may struggle to get a competing offer to beat the one it has sitting on the table right now from Sycamore Partners LP.

While the New York-based private equity firm’s $3-a-share unsolicited proposal this week was less relative to sales than any U.S. retail acquisition ever completed, traders who profit from takeovers aren’t betting a higher bid for Talbots will emerge, according to data compiled by Bloomberg. The company, which sells clothes to women over 35 years old, traded 8.3 percent below the offer yesterday, the data show.

After Talbots’ managers cost owners more money than any other specialty apparel retailer in North America this year as analysts projected its worst sales slump will deepen, Sycamore said the company still “rebuffed” its attempts to discuss a potential sale. With Talbots losing 5 cents on each dollar of sales in the past year, Janney Montgomery Scott LLC and Wedbush Securities say the proposal gives shareholders a “compelling” premium and protects against further losses after its stock plummeted by as much as 82 percent this year.

“Take the money and run,” Paul Lejuez, an analyst at Nomura Holdings Inc. in New York, said in a telephone interview. “That probably is the best way to sum up our view. The market doesn’t think that anybody else is going to step in.”

Talbots, which said it would evaluate the offer with its legal and financial advisers in a Dec. 6 statement, declined to comment beyond the release, according to Rachel Rosenblatt, a spokeswoman for the Hingham, Massachusetts-based company.

Unsolicited Offer

Jennifer Friedman, a spokeswoman for Sycamore, said the firm declined to comment beyond its filing this week with the U.S. Securities and Exchange Commission.

Today, Talbots rose 2.9 percent to $2.83 in New York.

Founded in 1947, the women’s retailer known for its traditional basics such as blazers, ballet flats and pearls has lost almost all its value since reaching $3.4 billion in 2001.

Its capitalization shrank to $110 million this week after Talbots’ plunge this year, data compiled by Bloomberg show.

After Talbots closed at $1.56 on Dec. 6, Sycamore said in an SEC filing that it made an unsolicited proposal of $3 a share in cash for the company. The disclosure came one day after Talbots announced that Chief Executive Officer Trudy Sullivan will retire as soon as a replacement is found.

The offer by Sycamore for the 90.1 percent of Talbots that it doesn’t already own values the company’s equity at $212 million. That equals about 0.18 times its reported sales, according to data compiled by Bloomberg. In deals worth at least $100 million, the average apparel retailer sold for almost five times as much when compared with its revenue.

Youth Movement

From the time that Sullivan, the former president of Liz Claiborne Inc., became CEO in August 2007 until Sycamore announced its proposal, Talbots tumbled 93 percent.

Under her leadership, sales at Talbots have declined for four consecutive years as its decision to target younger shoppers by adding trendier styles alienated the company’s usual customers. Sullivan said in a March 24 teleconference the new looks confused its older female clientele.

Analysts estimate that revenue will decline for two more fiscal years, data compiled by Bloomberg show.

Investors have also abandoned Talbots as profit margins evaporated. In the past 12 months, the company lost 5 cents on each dollar of revenue, versus an average 5.1 percent margin for specialty apparel retailers in North America with market values greater than $100 million, data compiled by Bloomberg show.

“We cannot argue with an all-cash premium offer presented by Sycamore,” Adrienne Tennant, an analyst at Janney Montgomery, said in a report to clients dated Dec. 7.

Time and Money

“The immediacy of the all-cash payout versus the uncertainty of a highly volatile and precarious turn that could take years to materialize favors the near-term buyout, even if it ultimately might undervalue” Talbots, she said.

Talbots’ effort to expand by acquiring J. Jill Group Inc. for $517 million in 2006 also failed, saddling it with debt. Three years later, it sold most of J. Jill’s assets to Golden Gate Capital Corp. for $75 million. Stefan Kaluzny, Sycamore’s founder, was a managing director at Golden Gate at the time.

Talbots currently has about $125 million in borrowings versus $19 million in cash and short-term investments, data compiled by Bloomberg show. In the past year, the company spent $34 million more in cash on its operations than it brought in, the biggest deficit in any 12-month period since at least 2002.

“The business is broken and it’s going to take a lot of time and a lot of money to fix -- if it can be fixed,” said Nomura’s Lejuez. “We don’t see that there is much more value in it than that $3 price that they’re offering.”

Relative Value

Talbots’ largest shareholder, OppenheimerFunds Inc., said the company doesn’t need to sell itself and that the Sycamore offer is “too low” based on the value of its real estate and other assets. Instead, Talbots should refocus its brand on 45-to 65-year-old women and move “back towards its roots,” according to Mitchell Williams, the New York-based manager of the $2.3 billion Oppenheimer Value Fund.

“The idea that this has to be taken private to restructure it is not the only avenue to fixing the firm,” he said in a telephone interview. “They could go back to the basics. If the company executes well, that will be the thing that determines value over time. There are plenty of people interested in this company still.”

Williams declined to say how much Talbots is worth.

Sycamore didn’t mention a price of $3 a share when it approached Talbot’s board with its offer, according to a person familiar with the matter.

‘Bad Sweater’

The board is now evaluating its options and exploring whether to launch a formal auction process, said the person, who declined to be identified because the matter is private.

While the company could attract interest from other buyout firms and may be worth more than the current offer, Talbots’ board should negotiate with Sycamore, whose founder has been involved in other retail-related buyouts, Sachin Shah, a Jersey City, New Jersey-based merger arbitrage strategist for Tullett Prebon Plc, said in a telephone interview.

“It’s very easy to say the stock is worth a lot more because you’ve already lost a lot of money,” Shah said. “The company has been deteriorating. Talbots doesn’t have a significant winning hand here to say no” to Sycamore, he said.

The plunge in Talbots’ stock also shows investors have lost confidence in management’s ability to boost shareholder returns, according to Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $4.5 billion.

“My advice for Talbots’ board is to take the deal before they want to return it like a bad sweater,” McCormick said in a telephone interview. “It’s a no brainer.”

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