Rue21 Investors Have Nothing to Lose in Buyout Bet
Rue21 Inc. investors holding out for a rival takeover offer may have nothing to lose.
Some traders have been betting a competing bid will emerge to top Apax Partners’ $42-a-share buyout offer for the teen clothing retailer, pushing the stock as high as $42.49 last week. Even if no other offers surface, the deal gives Rue21’s shareholders a $42 floor. The stock closed yesterday at $41.89.
“Your downside risk is very, very limited,” Stephanie Wissink, a Minneapolis-based analyst at Piper Jaffray Cos., said in a telephone interview. “It could be a done deal” with Apax, she said. However, “the stock has been tip-toeing around $42. Any time you spotlight a company through a buyout and you establish market value, it always intrigues other exploratory private-equity companies to look at it and ascribe value.”
Rue21’s board has through July 2 to solicit other buyers and the break-up fee, equal to about 1 percent of the $1.1 billion deal value, is a smaller hurdle than other recent takeovers in the industry, according to data compiled by Bloomberg. With no debt and free cash flow that’s projected to almost triple by 2015, Wissink said Rue21 fits most private-equity firms’ wish lists.
Representatives for Rue21 and Apax declined to comment on whether other suitors have expressed interest.
Apax’s offer is about 1.2 times the $902 million of sales Rue21 generated in the year that ended in February, data compiled by Bloomberg show. The last takeover that valued a U.S. apparel chain at more than its trailing 12-month revenue was the buyout of J. Crew Group Inc. announced in 2010, the data show. The median sales multiple for deals in the industry has been just 0.5.
The SKM II funds, which are associated with Apax, a London-based private-equity firm, own about 30 percent of Rue21’s outstanding shares and have agreed to vote in favor of the transaction, according to the May 23 statement announcing the deal.
For that reason, Adrienne Tennant, an analyst for Janney Montgomery Scott LLC, said she expects the deal to close, which would guarantee Rue21 shareholders receive at least $42 a share.
“We believe the deal will be consummated at the proposed price,” Tennant wrote in a June 3 note to clients.
Still, Rue21 shares have risen above the $42 offer in five of the last eight trading sessions since the deal was announced. That’s a sign some investors are wagering other suitors will surface with bids topping Apax’s. If that happens and the deal with Apax is terminated, the SKM II funds have agreed to vote for the superior transaction.
Today, Rue21 rose 0.2 percent to $41.99 at 9:47 a.m. New York time.
Should a better offer emerge by next month, the company will need to pay Apax a $10.5 million break-up fee, which is about 1 percent of the total deal value. That’s low compared with Sycamore Partners’ $600 million buyout of Hot Topic Inc., which carries a termination fee of $21 million, or 3.5 percent, data compiled by Bloomberg show.
Last year’s takeovers of Charming Shoppes Inc. and Collective Brands Inc. had termination fees larger than 2 percent, the data show.
Despite that, Paul Lejuez, a New York-based analyst at Wells Fargo & Co., said he doesn’t expect another retailer or financial buyer to bid for Rue21.
“The ‘go-shop’ period is more a reflection of the insider position held by Apax, and the need to ensure fairness in the overall sale process,” he wrote in a May 23 report.
Still, the retailer offers something that most private-equity firms want, Amy Hu Sunderland, a Hong Kong-based analyst at Grandeur Peak Global Advisors LLC, said in April. Rue21 is projected to generate more than $44 million of cash flow from operations after deducting capital expenses in the 12 months ending in January 2015, almost triple last year’s figure, according to analysts’ estimates and data compiled by Bloomberg.
The chain, which is located in what it calls “small and middle-market communities” and competes with Wal-Mart Stores Inc., has room to increase its number of stores and also boost revenue by selling items through its website, said Piper Jaffray’s Wissink.
Buyers tend to look for “growth, attractive cash generation and some sort of niche positioning,” Wissink said. “Rue21 has all three of those things.”
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