Chico’s Luring Activist Seen as LBO Target: Real M&A

Chico’s FAS Inc. stands to hand shareholders a gain of at least 38 percent should activist investor Blue Harbour Group LP’s efforts to unlock value at the women’s clothing chain spark takeover interest.

Blue Harbour, led by former KKR & Co. general partner Clifton S. Robbins, disclosed a 5.6 percent stake in Chico’s last month and said talks with management could lead it to propose changes at the operator of chains including White House Black Market and Soma Intimates. While the shareholder didn’t specify what steps it could take, JPMorgan Chase & Co. said some investors are speculating there’s an increased chance Chico’s may become a buyout target.

Chico’s Chief Executive Officer David Dyer previously headed Tommy Hilfiger Corp. and Lands’ End Inc., both of which were sold. Chico’s free cash flow and growth prospects may appeal to private-equity firms, said Maxim Group LLC, which estimates the $2.7 billion clothing retailer could fetch $23 a share in a takeover. The Fort Myers, Florida-based company trades at a lower multiple of revenue than more than two-thirds of similar-sized peers, according to data compiled by Bloomberg.

“David Dyer was CEO at two companies that were sold,” Rick Snyder, a New York-based analyst at Maxim Group, said in a phone interview. “People connect those dots and say Chico’s could be a takeout candidate. Chico’s has strong cash flow. They have a growth vehicle and those things are almost always attractive to private equity.”

Activist Approach

Representatives for Chico’s didn’t respond to e-mails or phone calls seeking comment about whether the company would be open to a sale. A representative for Blue Harbour said the firm declined to comment.

Blue Harbour already held a position in Chico’s before increasing its stake with its recent purchases to become its third-largest investor, according to data compiled by Bloomberg. It said in a Sept. 9 filing that it has had and may continue to have talks with management that could result in actions including proposing changes in the company’s operations.

The Greenwich, Connecticut-based hedge fund takes positions in companies whose management teams may be open to new ideas, and works collaboratively with them to unlock value over two to three years, avoiding hostile tactics such as proxy fights. Its investments also include government contractor CACI International Inc. and Canadian trash hauler Progressive Waste Solutions Ltd., data compiled by Bloomberg show.

Clear Goals

Chico’s stock is down 9.8 percent this year after the company missed analysts’ earnings estimates for three straight quarters. The retailer trades at about 1 times its projected revenue this year of $2.66 billion, according to data compiled by Bloomberg. That compares with an average multiple of 2 among specialty-apparel stores valued at more than $1 billion, the data show.

“Blue Harbour’s goals are very clear -- to have the share price reflect the best possible value for the company,” Richard Jaffe, a New York-based analyst at Stifel Financial Corp., said in a phone interview. “If it’s a sale or whatever possibility they can dream up, I don’t think Blue Harbour would object.”

Chico’s shares have climbed more than 3 percent since the Sept. 9 filing by the activist. Some of that gain may be from investors speculating a deal may be in Chico’s future, said Brian Tunick, a New York-based analyst at JPMorgan.

Today, Chico’s climbed 2 percent to $16.99.

CEO Dyer sold Lands’ End to Sears Roebuck & Co. in 2002 and then agreed to sell Tommy Hilfiger to private-equity firm Apax Partners LLP in 2005.

Deal History

Blue Harbour has also been involved in retail takeovers. The firm held about a 10 percent stake in Yankee Candle Co. and was working with the company on alternatives including a possible sale when it agreed to be bought by private-equity firm Madison Dearborn Partners LLC in 2006.

As a shareholder of Warnaco Group Inc. and a prior shareholder of PVH Corp., Blue Harbour also said it advocated for a “strategically compelling” combination before the two clothing companies merged this year.

“There’s a history that Blue Harbour has been pushing sales of companies,” Tunick said in a phone interview. “Then you throw in Dave Dyer and his history of selling companies. Private equity are willing buyers of companies.”

Some investors may be betting on “an increased chance now that Chico’s can consider exploring things,” he said.

Tunick estimated Chico’s could be valued at $25 to $27 a share in a takeover, or as much as a 62 percent premium.

Buyout Appeal

Chico’s has strong free cash flow and growth opportunities through its Soma lingerie and White House Black Market chains, said Snyder of Maxim.

Sales at Soma are expected to more than double over the next four years as the chain’s store base grows, Simeon Siegel, an analyst at Nomura Holdings Inc., wrote in a Sept. 9 report. Analysts estimate Chico’s total revenue will grow 31 percent to $3.4 billion through the year ending January 2017.

The company last year generated record free cash flow of $204 million.

“Those are things that private equity generally appreciates,” Snyder said. Private-equity firms also could see an opportunity to close some Chico’s stores, he said.

While Chico’s trades at a discount to some of its peers, its current valuation may not be cheap enough to entice bidders, said Susan Anderson, an Arlington, Virginia-based analyst at FBR & Co. Even so, Chico’s meets many of the criteria of an attractive LBO target, including having no debt, Anderson said.

“I wouldn’t put it out of the question,” she said in a phone interview. “Definitely they have some great brands. They do have a great niche” and there’s still opportunity for square-footage growth.