Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

When George Zimmer guarantees something, he means it. No poorly tailored suits leaving his stores. No ill-fitted mergers destroying his former company.

The founder of Men's Wearhouse -- who famously signed off the suitmaker's TV commercials with, "You're gonna like the way you look, I guarantee it" -- is still deeply attached to the business despite being booted from it in 2013, a story for Inc. magazine's June issue reveals. This is good news for some gravely disappointed shareholders who hate the way the company looks now. As the stock has cratered, Zimmer tells Inc. that he's "been talking with private equity groups about trying to buy back Men's Wearhouse."

Unraveling
Men's Wearhouse's takeover of Jos. A. Bank is destroying shareholder value and looking hopeless. Can George Zimmer save his former company from this messy merger?
Source: Bloomberg

Now, what had been one of the most sensational M&A situations for traders during the past few years (even though it didn't involve the largest of companies) is returning to the spotlight. The shares climbed about 3 percent on Monday morning on the prospect of Zimmer maybe, possibly returning as a hero to save the beleaguered retailer. 

Recall that before his ouster, Zimmer, then-executive chairman and 64 years old, wanted to take Men's Wearhouse private, having clashed with the very management he put in place. After he was out, Men's Wearhouse instead merged with rival Jos. A. Bank in a deal that inspired high hopes but which is ripping at the seams.

Tailored Brands, the appropriately dull name given to the merged entity, has lost more than three-quarters of its value during the roughly two years since the transaction closed. Its $619 million market capitalization on Friday is far below the $1.8 billion Men's Wearhouse dished out -- in cash -- for Jos. A. Bank.

Earlier this month, Andrew Left of Citron Research, the short seller who helped expose drugmaker Valeant's problems, said he's been betting against Tailored Brands. Like many retailers, its struggles are both internal and external -- mounting debt amid a challenging retail environment. In December, a Barclays credit analyst called Men's Wearhouse "uninvestable." And while the latest quarter was horrible for many big-name chains, Tailored Brands was even worse off because of the merger.

Shorts Target Suits
Short sellers including Andrew Left of Citron Research are betting shares of Tailored Brands will drop even further. Monday's surge from takeover speculation could cause a short squeeze.
Source: Bloomberg

In addition to an 11 percent drop in net sales (dragged down by Jos. A. Bank), Tailored Brands suffered a nearly $1.2 billion impairment charge related to the purchase, which contributed to a massive $21.86 per share loss for the quarter ended Jan. 30. This is ultimate buyer's remorse. An activist investor pushed for this merger, and it's incredible that one hasn't called for its undoing yet.

The company quickly learned last year that Jos. A. Bank's longtime, ridiculously aggressive buy-one-get-three-free promotions were what brought customers into its stores. CEO Doug Ewert -- though the bitter Zimmer refers to Tailored Brands' executives as "Cassius and Brutus" in the Inc. piece -- said "the transition away from unsustainable promotions has proven significantly more difficult and expensive than we expected." That's one way of putting it.

Merger Meltdown
Jos. A. Bank's sales have plunged since Men's Wearhouse paid a premium to acquire the chain in 2014.
Source: Company filings

Until now, the only options seemed to be watching and waiting for Tailored Brands to figure out how to stop the bleeding and in the meantime, maybe sell some smaller units to help pay down debt, which is triple its market value. 

If Zimmer is serious and can get the financial backing to rescue Men's Wearhouse from its mistakes, even better. That may be a big if. Zimmer himself, when running the numbers, admits it won't be easy to make the numbers work. But this suit saga isn't over.

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

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net