J. Crew Luring Record Price Opens Exit for TPG : Real M&ABrooke Sutherland
For $5 billion, J. Crew Group Inc.’s private-equity owners might be wise to sell the preppy clothing retailer to Uniqlo operator Fast Retailing Co.
J. Crew, acquired by TPG Capital and Leonard Green & Partners LP in 2011, may be valued that highly in a sale to the Japanese retailer or in an initial public offering, according to a person familiar with the matter. A sale at $5 billion would be the largest on record for an apparel company and would imply a revenue multiple more than three times the industry median during the past decade, according to data compiled by Bloomberg.
While publicly traded retailers such as Michael Kors Holdings Ltd. have reached higher valuations, J. Crew’s owners may prefer to sell now at a fixed price for a more immediate exit, Sky Harbor Capital Management LLC said. For Fast Retailing Chief Executive Officer Tadashi Yanai, who has said he wants to turn his company into the world’s biggest clothing purveyor, it may be worth paying up to get a hold of the J. Crew brand and its 451 stores, said Diamond Hill Capital Management Inc.
“They have good brands, they’re very well-known but that would be a very large purchase price,” Scott Rostan, founder of New York-based Training The Street, which teaches new hires at investment banks how to structure mergers and acquisitions, said in a phone interview. “If you get an offer you can’t refuse, you’re probably going to take it.”
A $5 billion acquisition would be almost twice the price of J. Crew’s buyout three years ago and would value the company at 2.1 times its $2.4 billion in estimated sales for the fiscal year ended last month, according to data compiled by Bloomberg. The price also implies a valuation of about 14 times its adjusted earnings before interest, taxes, depreciation and amortization in the same period, the data show.
The median revenue multiple for retail industry deals in the last decade was 0.6, and the median Ebitda ratio was 8.5, according to data compiled by Bloomberg.
“For a company that size, that’s a pretty high multiple,” Trevor Kaufman, a Greenwich, Connecticut-based analyst at Sky Harbor, said in a phone interview. “That would be a tremendous deal” for TPG and Leonard Green, said Kaufman, whose firm oversees about $8 billion, including J. Crew bonds.
Selling to Fast Retailing would be more appealing to J. Crew’s owners than betting it will get the same or higher price in the public market, said Kaufman and Bill Zox of Columbus, Ohio-based Diamond Hill. In an IPO, private-equity firms typically continue to hold shares after the sale, making them vulnerable to market swings as they wind down their stakes.
“You’d be more certain to maximize value in a strategic acquisition than you would counting on perhaps an irrational price in the public market,” Zox, whose firm oversees about $12 billion, including J. Crew bonds, said in a phone interview.
The talks with Fast Retailing are at an early stage and other potential bidders have also expressed interest, according to a person familiar with the matter, who asked not to be identified discussing confidential information. Buyout firm Advent International Corp. is also interested in J. Crew, two other people said.
Keiji Furukawa, a spokesman for Yamaguchi, Japan-based Fast Retailing, and Margot Fooshee of J. Crew declined to comment on the talks. A representative for Fort Worth, Texas-based TPG Capital declined to comment on whether the firm preferred a sale or an IPO. A representative for Los Angeles-based Leonard Green didn’t respond to a request for comment.
Shares of Fast Retailing climbed 3 percent to 36,975 yen today.
Fast Retailing may consider $5 billion a fair price for J. Crew, whose merchandise, real estate and e-commerce expertise will help the Japanese company achieve its U.S. expansion goals, Zox said.
The retailer is seeking to quadruple sales to 5 trillion yen ($49 billion) by 2020, with 20 percent coming from the U.S., Chief Financial Officer Takeshi Okazaki said last week. In the U.S., Fast Retailing operated 17 Uniqlo stores as of November and plans to open more. The company also owns the Theory brand. Yanai reiterated the goals today and said they were achievable through organic growth.
The clothing company “needs something instant if it wishes to come close to its target,” Ashma Kunde, an apparel analyst at Euromonitor International, wrote in a report after the talks were reported Feb. 28. A deal for J. Crew “would bring Fast Retailing a big step closer to achieving its American dream. The company could not have picked a more suitable target.”
J. Crew had a 0.7 percent share of the U.S. apparel market in 2013, while Fast Retailing controlled less than 0.1 percent, according to preliminary data compiled by Euromonitor. The acquisition would vault Fast Retailing ahead of rivals Hennes & Mauritz AB and Zara-owner Inditex SA in the U.S.
Fast Retailing had 323.5 billion yen ($3.16 billion) in cash and equivalents at the end of November. While Takahiro Kazahaya of Deutsche Bank AG said the clothing company should be able to finance a deal even at the highest estimated price, Citigroup Inc. analyst Masataka Kunito said $5 billion is “excessive.”
Absent a takeover, J. Crew could fetch a similar valuation in an IPO, according to Josef Schuster, founder of IPOX Schuster LLC. Recent public offerings of apparel retailers suggest J. Crew would see strong investor demand for its shares, said Schuster, whose Chicago-based research firm focuses on IPOs.
Michael Kors, the luxury-goods company founded by the designer of the same name, has risen almost fivefold since going public in December 2011. Burlington Stores Inc. has jumped 57 percent since its October offering.
“There seems to be good momentum for this kind of stock,” Marino Marin, a managing director in MLV & Co.’s investment banking group and a managing principal in the firm’s proprietary investment arm, said in a phone interview. “An IPO would be well-priced. It would be a good exit.”
There’s no guarantee the public markets will award J. Crew the Ebitda multiple of about 14 implied by a $5 billion pricetag. While H&M’s enterprise value is 17.5 times Ebitda, Gap Inc. is valued at 7.3 times. Specialty apparel retailers with market capitalizations of more than $1 billion have a median Ebitda ratio of less than 9, according to data compiled by Bloomberg.
With H&M, “to be blunt, they rock,” Rostan of Training The Street said. J. Crew “could get there. The question is how long would it take.”
A $5 billion sale to Fast Retailing would be “a bird in the hand,” he said.