J. Crew Investors Vote in Favor of Takeover by TPG, Green

J. Crew Group Inc. shareholders voted in favor of TPG Capital and Leonard Green & Partners LP’s takeover, capping Chief Executive Officer Millard Drexler’s months-long effort to take the apparel chain private.

Holders of about 36.4 million shares, not affiliated with J. Crew managers, voted in favor of the takeover, according to a statement today. That’s about 57 percent of New York-based J. Crew’s common shares outstanding.

The buyout firms offered $43.50 a share in November, valuing J. Crew at about $3 billion. Paulson & Co., which held about 9 percent of the stock as of Dec. 31, voted late yesterday to support the transaction, according to a person familiar with the situation. Fidelity Management & Research, BlackRock Inc. and other large institutional investors also backed the bid, according to the person.

Drexler, 66, had worked to shore up support for the takeover following more than a dozen investor suits accusing him of diluting the offer price by refusing to work with anyone but TPG. Operating outside public view will allow him to focus more on fixing the company’s clothes than worrying about quarterly results, said Amy Noblin, an analyst for Weeden & Co. in Greenbrae, California.

“They’ve had fashion mistakes, but those are correctible,” said Noblin, who has a hold rating on the shares. The deal is scheduled to close by March 7.

Fidelity, BlackRock and Paulson declined to comment.

J. Crew rose 41 cents to $43.53 at 4:01 p.m. in New York Stock Exchange composite trading. Before today, the shares had traded below the buyout price of $43.50 since Feb. 22.

Proxy Advisers’ Perspective

Proxy advisory firms Institutional Shareholder Services and Glass Lewis & Co. had both advised investors not to support the bid. The apparel chain had held last-minute meetings to convince large investors to vote in favor, three people familiar with the matter said this week. For the purchase to go through, a majority of holders not affiliated with the company or buyout group had to back the offer.

Before the vote, Mason Capital Management, a New York-based hedge fund with 7.5 percent of J. Crew’s stock, was the sole large investor to publicly say it wouldn’t vote for the deal. Principal Michael Martino told the board in a Feb. 11 letter that the buyers should raise the price so that “all shareholders, not just those named Drexler,” got the fair value of their stock.

Drexler’s Performance

Drexler has more than doubled revenue since coming to J. Crew from Gap Inc. in 2003. His company operated about 250 apparel stores across the U.S. as of February, including 20 Madewell outlets. Still, the retailer lowered its full-year profit forecast at least twice in 2010, saying its customers had slowed spending.

Suing shareholders and the proxy advisers accused Drexler of using his executive clout to organize a sale process that excluded everyone but Fort Worth, Texas-based TPG, blocking other suitors from sweeping in with a better price.

“A more level playing field would have addressed many legitimate and well-documented shareholder concerns about the legitimacy of the negotiation process in these inherently conflicted management buyouts,” ISS said Feb. 21. J. Crew called the Rockville, Maryland-based firm’s report “deeply flawed.”

Lawyers for the suing shareholders are proceeding with the case and expect to win substantial compensation for their clients, Stuart Grant, a Wilmington, Delaware-based lawyer for disgruntled investors, said in a telephone interview. Margot Fooshee, a spokeswoman for J. Crew, declined to comment.

Deal’s Origins

Drexler first met with Los Angeles-based Leonard Green, at the behest of TPG, on Aug. 23, according to a J. Crew regulatory filing. Three days later, on a conference call with analysts to discuss second-quarter results, Drexler described his customers as “deferring” and a “little nervous.”

Less than a month later, J. Crew Chief Financial Officer James Scully provided TPG, which once owned the company and brought Drexler in to run it, with non-public financial results and forecasts. Drexler then talked with the buyout firms at least three more times before beginning to tell board members on Oct. 7 of TPG’s interest.

While the board formed a special committee to take control of the sales process, Drexler said he would only work with TPG, leading the group to forgo a search for other buyers. After the deal’s announcement, the board initially had about two months to solicit competing bids, and extended that to ease investor concerns over the price. No other offers emerged.

The bid of $43.50 a share valued the acquisition at $2.64 billion, including net cash, and made it the second-largest deal for a North American apparel retailer in the past 10 years through 2010, according to Bloomberg data. Apollo Global Management LLC’s purchase of Claire’s Stores Inc. in 2007 for $2.85 billion ranked first.

(Updates shares in seventh paragraph.)
    Before it's here, it's on the Bloomberg Terminal. LEARN MORE