Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Activists aren't always right: that's the message Corporate America trumpets nearly every time they're pitted against one.

The 40-percent-plus nosedive by Men's Wearhouse on Friday -- its biggest drop since 1992 -- would seem to bolster that case.

Last year, the retailer acquired rival chain Jos. A. Bank in a $1.5 billion deal that hedge fund Eminence Capital threw its weight behind. Notably, Eminence said it didn’t have the initial intention of agitating for change when it took a stake in Men’s Wearhouse in the fall of 2013; it was propelled into action when Men’s Wearhouse refused Jos. A. Bank's advances.

Eminence began advocating for the companies  to enter talks, saying a merger would create up to $2 billion in value, driven by some $100 million in cost savings, $280 million in revenue synergies and a lift in the combined company’s P/E multiple when Wall Street rewarded the combination.

The Ricky Sandler-led fund reckoned the cost savings could come from areas including purchasing, distribution, advertising and marketing and general administrative expenses. New revenue could come from a bigger push into e-commerce and more tuxedo rentals.

Eminence believed in the deal so fiercely that to complement its almost 10 percent stake in Men’s Wearhouse, it later took a nearly 5 percent stake in Jos. A. Bank and nominated directors to the latter's board.

By the fund’s math, a combination would create the only publicly-traded "pure-play" men’s apparel retailer, with a projected market value of $4.9 billion. 

Tale of the Tape
SOURCE: Bloomberg

That hasn’t happened: Friday’s plunge has left Men’s Wearhouse with a market value closer to $1 billion after it was forced to slash its earnings guidance. Jos. A. Bank’s same-store sales have declined further than expected because customers just don’t love the retailer’s change in discounting policy (goodbye "buy-one,  get-three-free" deals). 

Though the change in strategy hasn’t been explicitly endorsed by Eminence (and calls to the firm weren't immediately returned), it bumped its Men’s Wearhouse stake back up to 9.9 percent by buying stock as recently as last week, indicating it still believes in the story. 

Men’s Wearhouse’s CEO Doug Ewert says the company knows that changing brand perception and customer buying patterns will take time to bear fruit.

But until that turnaround surfaces, his company’s all-cash deal for Jos. A. Bank looks like a bust. It took on $1.7 billion in debt to finance the deal, which is weighing heavily on Men’s Wearhouse’s balance sheet: net debt/Ebitda has crept up past 7 times, according to data compiled by Bloomberg, a far cry from its near-zero borrowings in the four years that preceded the deal.

Even Eminence -- whose Men's Wearhouse stake lost $84 million overnight -- may be wishing it could turn back the clock.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net