Jos. A. Bank Spurning Offer Douses Bets on Deal: Real M&A

Jos. A. Bank Clothiers Inc.’s resistance to a merger with rival Men’s Wearhouse Inc. is wearing down traders who are passing on the chance to reap some of the biggest gains among pending takeovers.

Jos. A. Bank said this week that Men’s Wearhouse’s $57.50-a-share bid is too low and that it sees no reason to enter negotiations. The stock has fallen more than 7 percent below that price, signaling investors don’t expect the companies to work out a deal, even though Men’s Wearhouse has said it may be willing to increase the offer and Jos. A. Bank kicked off the bidding in the first place.

The gap separating Jos. A. Bank’s share price and the takeover bid now represents the widest spread of any pending acquisition in North America larger than $500 million, according to data compiled by Bloomberg. That would normally appeal to traders who see an opportunity to profit by betting that a deal will ultimately get done. Given Jos. A. Bank’s poison pill, staggered board and reported interest in buying Eddie Bauer, there may be too many hurdles, said FBN Securities Inc.

“I just don’t see how a hostile bid is going to prevail,” Kathleen Renck, New York-based head of event-driven research at FBN Securities, said in a phone interview. “Everybody wants a deal, but if you don’t want to sell the company and have defenses in place, you don’t have to.”

In Conflict

The two retailers have been in conflict since October when Men’s Wearhouse spurned an unsolicited bid from Jos. A. Bank. A month later, Men’s Wearhouse offered to buy the smaller chain for $55 a share in a tactic known as a Pac-Man defense, where a target thwarts being taken over by instead bidding for its suitor.

After Jos. A. Bank rejected the proposal and strengthened its defenses against takeovers, Men’s Wearhouse went directly to shareholders Jan. 6 with a cash tender offer at a new price of $57.50, or $1.6 billion. Men’s Wearhouse said last week in a letter to the company’s board that it’s “fully committed to the transaction” and prepared to raise the bid again. That narrowed the deal spread, pushing Jos. A. Bank’s stock to within $1.28 of the offer price.

Then, Jos. A. Bank surprised investors Feb. 2 when it sent a letter to Men’s Wearhouse that said the new bid “substantially undervalues” the company and that it sees “no benefit in commencing negotiations” with its rival.

No Engagement

A representative for Houston-based Men’s Wearhouse, which has a market value of $2.2 billion, declined to comment beyond last week’s letter. A representative for Hampstead, Maryland-based Jos. A. Bank declined to comment beyond its response to Men’s Wearhouse.

“This sounds like a bad divorce, where you’ve let all rationality go by the wayside so that you can just hose the other person,” Mark Montagna, an analyst at Avondale Partners LLC in Nashville, Tennessee, said in a phone interview. “Men’s Wearhouse definitely made it sound as though they would be willing to go higher, but Jos. A. Bank doesn’t seem to want to engage a discussion now.”

Meanwhile, Jos. A. Bank has been looking at other acquisition targets including Eddie Bauer, said people familiar with the matter, who asked not to be identified because the talks are private. It’s held preliminary talks to buy the outdoor clothing retailer from private-equity owner Golden Gate Capital, said one of the people. Golden Gate is the same firm that had committed financing to help Jos. A. Bank buy Men’s Wearhouse as part of its October offer.

No Match

A takeover of Eddie Bauer “is very unlikely to match the accretion and synergies of the Men’s Wearhouse combination,” David Mann, a New Orleans-based analyst at Johnson Rice & Co., wrote in a Feb. 4 report. “It appears that Jos. A. Bank is willing to go forward with its acquisition strategy without waiting to hear the preference of its shareholders, though we believe Jos. A. Bank shareholders would be clearly supportive of the tender offer.”

Shares of Jos. A. Bank have slipped 5 percent this week to $53.40 yesterday as investors showed disappointment that the company may be opting to buy Eddie Bauer rather than to sell itself to Men’s Wearhouse.

Today, Jos. A. Bank shares rose 1.1 percent to $54.

“This dance that they’re doing has involved some unusual moves and twists and turns that have shareholders concerned, hence the stock price coming down,” Gene Urcan, an investment banker at Cappello Group Inc., said in a phone interview from Santa Monica, California. “With everything going on, it certainly looks as if a deal is not going to happen.”

Successful Defenses

The hurdles in this situation are reminiscent of Air Products & Chemicals Inc.’s unsuccessful, year-long hostile pursuit of Airgas Inc. that began in February 2010, Renck of FBN Securities said. Air Products withdrew its bid after a Delaware judge upheld the packaged-gas supplier’s poison pill.

Also similar to Airgas, Jos. A. Bank’s board is staggered, meaning that its directors come up for re-election different years so that the entire board can’t be replaced at one time.

While many traders who purchased Jos. A. Bank shares in the last two months may have lost money on the investment, those funds could be recouped if the company negotiates a friendly deal with Men’s Wearhouse. It wouldn’t be the first time a deal investors thought was in jeopardy ended up closing.

Winning Bet

Express Scripts Holding Co. needed to win Federal Trade Commission approval to proceed with its takeover of Medco Health Solutions Inc., which was announced in 2011. For months, the deal had a wide spread because investors weren’t sure it could clear the regulatory hurdles. Traders who purchased Medco when the spread was its widest made a more than 40 percent return when the transaction closed, data compiled by Bloomberg show.

A deal between Jos. A. Bank and Men’s Wearhouse may still happen because it makes sense for both companies, according to Urcan of Cappello Group. It’s going to come down to price and deciding which is the buyer and which is the seller, he said.

Jos. A. Bank has been told by five of its largest shareholders to start talking to its rival about a sale, people with knowledge of the matter said last month. Eminence Capital LLC, which has an almost 10 percent stake in Men’s Wearhouse and also holds Jos. A. Bank shares, sued Jos. A. Bank directors last month for rejecting the bid and for toughening its anti-takeover defenses. The New York-based hedge fund amended its complaint this week.

When Jos. A. Bank first bid for Men’s Wearhouse, it said a deal would help cut costs, boost earnings and improve their merchandising capabilities. Men’s Wearhouse echoed those statements when it made its offers.

“I’d like to think that cooler heads will prevail and a deal will get done,” Urcan said. “Everyone seems to believe it makes sense. It just may take a little bit more time and a higher price.”

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