Moving On

Abercrombie Buyout Idea Was Band-Aid, Not Solution

A deal for the retailer would have saddled any combined entity with debt and integration headaches.
Photographer: Gareth Cattermole/Getty Images
At Closing, May 25th
25.45 USD
At Closing, May 25th
22.97 USD

Abercrombie & Fitch Co.'s jilted suitors have dodged a bullet.

The retailer, whose labeled T-shirts and short shorts were once staples of teen wardrobes, slumped 20 percent Monday after announcing it had terminated efforts to sell itself. Suitors included Express Inc. and American Eagle Outfitters Inc. (paired up with private equity firm Cerberus Capital Management) but price reportedly proved to be a sticking point. It's not surprising that Abercrombie holders are ruing the loss of a takeover premium, but shares of Express and American Eagle also dropped. Those investors should be less forlorn. 

Why So Upset?

Express and American Eagle dropped on the news that takeover talks for Abercrombie had fallen apart

Source: Bloomberg

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Between 2010 and the end of last year, there were 23 takeovers of North American apparel retailers and brands by rivals or private equity firms (excluding deals smaller than $250 million). Of that list, there are few examples of success stories. It seems highly doubtful that American Eagle, Express, Cerberus or really any buyer was going to turn the tide with an Abercrombie takeover.

Private equity firms bear a lot of the blame for the bankruptcies that have ensued from retail takeovers, including Rue21 Inc. and children's clothing chain Gymboree Corp. But retailer-to-retailer combinations haven't fared much better. Tailored Brands Inc. (formerly Men's Wearhouse) has struggled to integrate Jos. A. Bank Clothiers Inc. and its discount-heavy business (buy one, get seven free!). Ascena Retail Group Inc. last month announced a $1.32 billion impairment charge largely attributable to its $2 billion acquisition of Ann Inc. less than two years ago. Read more on that deal here

Retailers have a hard enough job trying to adapt stand-alone businesses to online-shopping preferences and convince shoppers to pay full price after years of deep discounting. They make things harder on themselves by tacking on a hefty debt load or trying to merge brands with divergent identities. Mergers may give companies a few cost synergies to ease the pain, or in the case of private equity buyouts, a reprieve from the critical eyes of Wall Street. But then what? The retail environment is still going to be garbage once the synergies have been milked.

Stuck in a Rut

Abercrombie has been struggling for a while now and a buyout isn't going to fix its depressed sales. It will just have to get creative.

Source: Bloomberg

American Eagle is in the enviable position of actually doing somewhat OK these days. Same-store sales rose 3 percent in the fiscal year ended this past January. Why would it want to mess that up with a tricky integration of Abercrombie? 

That's of course little comfort to those Abercrombie holders who were hoping their long nightmare was finally set to end, albeit at what would have been a bargain bin price. But all isn't lost. Abercrombie has a net cash position and is arguably in a better position to turn itself around than if it had been burdened with takeover debt. My colleague Shelly Banjo has suggested Abercrombie could spin off its faster-growing Hollister brand and shut down its namesake stores entirely to re-emerge as a wholesale brand. It will be uglier to undertake either option while publicly traded, but the value proposition holds true.

Abercrombie can't stand pat. It needs to do something to shake up a business model that is clearly not working anymore. That helping takeover hand isn't all it's cracked up to be, though.

--With assistance from Tara Lachapelle

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

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