Men’s Wearhouse Turns Target With Or Without Founder

George Zimmer, the founder of Men’s Wearhouse Inc. who was ousted after encouraging the company to consider going private, has put the retailer in play -- with or without him.

The board of Men’s Wearhouse fired Zimmer as executive chairman last week, citing disagreements over the Houston-based retailer’s direction, including his desire to evaluate taking the clothing chain private. While management’s opposition to a sale makes a bid more complicated for private-equity firms, the $1.85 billion company offers cash generation, a clean balance sheet and limited exposure to swings in fashion trends, according to Cowen Group Inc.

“George essentially put it in play,” David Fann, chief executive officer of TorreyCove Capital Partners LLC, a La Jolla, California-based firm that advises private-equity managers and investors, said in a telephone interview. “Men’s Wearhouse has brand equity, it has a significant store presence and cash flow. It’s the perfect fit for a private-equity firm.”

Even after its shares rose 34 percent in the past year, Men’s Wearhouse trades at a lower valuation relative to profit than 95 percent of similar-sized specialty retailers, according to data compiled by Bloomberg. The company could fetch about $50 in a takeover, a 36 percent premium to yesterday’s close, JPMorgan Chase & Co. and shareholder Sentinel Investments said.

Ken Dennard, a Men’s Wearhouse spokesman who works for Dennard-Lascar Associates LLC, declined to comment on whether the company has been approached by private-equity firms.

Buyout Option

The board of Men’s Wearhouse said a buyout wouldn’t be in the best interest of shareholders and would require the retailer to shoulder “a huge amount of debt,” according to a June 25 statement. Zimmer also clashed with management, according to the statement, over a plan to review alternatives for the company’s K&G chain -- a process to which the board said it remains committed.

Zimmer, who owns a 3.5 percent stake, said he encouraged the board earlier this year to study a range of strategic alternatives, including the possibility of going private. Instead, “the board quickly and without the assistance of financial advisors simply rejected the idea,” he said in a statement yesterday.

Zimmer said in the statement that, at this point, he hasn’t decided that taking Men’s Wearhouse private is “a better means of preserving the unique culture and values that have made the company so successful over the years.”

Boosting Value

Glenn Krevlin, a New York-based money manager at Glenhill Capital, said that while a buyout isn’t inconceivable, he wants management to boost shareholder value through buybacks. In March, Chief Executive Officer Doug Ewert announced that Men’s Wearhouse plans to repurchase $200 million of shares.

“We would like to see the company be more aggressive in its share repurchase activities than it has been in the past year or so,” Krevlin, who oversees $1 billion, including Men’s Wearhouse shares, said in a phone interview.

Analysts, on average, estimate the stock will reach $38 in the next 12 months, just 3.1 percent higher than yesterday’s closing level.

Today, Men’s Wearhouse shares rose 2.6 percent to $37.80, the highest since May 2012.

Including net debt, Men’s Wearhouse is valued at 5.3 times its $325 million in earnings before interest, taxes, depreciation and amortization in the last 12 months. That compares with the median multiple of 9.5 among global specialty-apparel companies with a market value of more than $1 billion, according to data compiled by Bloomberg.

‘Attractive’ Target

“Given current valuation, I think it is possible that he would explore the possibility of taking the company private,” Colin Kelly, an analyst at Spokane, Washington-based Signia Capital Management LLC, which oversees $550 million including Men’s Wearhouse shares, wrote of Zimmer in an e-mail. “Men’s Wearhouse is a very attractive acquisition target for private equity. Private equity could certainly do a deal that would not involve Zimmer.”

The clothing-store chain should be valued at $50 a share in a takeover, said Jason Ronovech, a money manager at Montpelier, Vermont-based Sentinel Investments, which oversees $26.4 billion and owned Men’s Wearhouse shares as of March 31.

A bid at that price would give Men’s Wearhouse an equity value of $2.5 billion, making it the biggest U.S. shoe or apparel retail transaction valued at more than $1 billion since TPG Capital and Leonard Green & Partners LP agreed to take J.Crew Group Inc. private in 2010, according to data compiled by Bloomberg.

Zimmer Return?

Zimmer could pursue a leveraged buyout for Men’s Wearhouse, Brian Tunick, an analyst at New York-based JPMorgan, wrote in a June 25 note.

“Mr. Zimmer could look to team up with a number of private-equity firms and he could argue that he is well-positioned to come back to run the company full time,” Tunick wrote. He estimated the company could be valued at about $50 a share in a go-private deal, based on recent retail buyouts.

Lindsay Andrews, a spokeswoman for Zimmer with Sard Verbinnen & Co., declined to comment on whether the founder has contacted private-equity firms.

The retailer has fairly stable cash generation and low debt, said John Kernan, a New York-based analyst at Cowen.

For a financial buyer, “the economics of it probably make sense,” Kernan said in a phone interview. “There’s not a lot of fashion risk with this. They’re just literally selling suits and basic sportswear.”

Cash Flow

Men’s Wearhouse generated $115.2 million in free cash flow in the last 12 months and has a $300 million revolving line of credit, according to data compiled by Bloomberg.

The clothing-chain’s trailing 12-month operating margin of

8.4 percent lags behind 85 percent of peers, signaling that there could be room for improvement, data compiled by Bloomberg show. The opportunity to trim expenses is one reason private-equity firms are drawn to retail targets, according to Jaime Katz, a Chicago-based analyst at Morningstar Inc.

Still, selling suits involves higher fixed costs and is vulnerable to swings in the unemployment rate, Kernan said. That could complicate a buyout for private-equity firms, he said.

“They’ve got to somehow monetize the investment,” Kernan said. “I’m just not sure what the exit strategy would be post-takeout.”

Still, Zimmer’s departure and his push for Men’s Wearhouse to consider the possibility of a sale could spur private-equity firms to evaluate a buyout, especially given its low valuation, said Fann of TorreyCove.

“Whether he’s shopping around for a private-equity firm to work with or not, I think there are a lot of folks now who are looking at the opportunity,” he said. “The stock looks relatively cheap. It is seemingly the type of transaction that the private-equity guys would get involved in.”

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