Jos. A. Bank and Eddie Bauer Combine to Form Khaki Pants Powerhouse
There's no real reason for stylish clothes to correlate with stylish PowerPoint slides, but you'd have to say that Jos. A. Bank's presentation laying out its acquisition of Eddie Bauer does not betray a sophisticated eye for fashion. Get excited:
But there is much to love in this deal. Jos. A. Bank, facing a hostile takeover offer from the essentially indistinguishable Men's Wearhouse, chose to go a different way with Eddie Bauer. Jos. A. Bank poetically describes Eddie Bauer as an "iconic, authentic dual-gender outdoor lifestyle brand," and you can see how that complements Jos. A. Bank, which is among other things single-gender and distinctly indoorsy. The synergies are correspondingly lower than you'd get in a Jos. A. Bank/Men's Wearhouse tie-up, but you can't put a price tag on being ever so slightly cooler.
Also here is a skeptical analyst saying "There'll be synergies on certain product lines like khaki pants," which has made my day quite a bit brighter.
The structure of the transaction is interesting too. Jos. A. Bank will do the following:
- Pay Eddie Bauer's private equity owners, Golden Gate Capital, something like $564 million in cash.
- Give Golden Gate 4.7 million shares of Jos. A. Bank stock "at $56 per share," for a value of the stock consideration of $261 million (and total consideration of $825 million).
- After the acquisition closes, go and tender for 4.6 million of stock at $65 per share, for a total of $300 million.
Coincidentally, we talked last week about Green Mountain's strategy of selling stock to Coca-Cola in order to buy back stock from the public at a higher price, and you can see a little of that sell-low-buy-high strategy here too. Like the efficient deal here would be:
- Jos. A. Bank pays Golden Gate say $835 million in cash for Eddie Bauer.
- That's it.
More compelling is that Jos. A. Bank is doing this deal in part, sure, because "Eddie Bauer Has Long Been of Interest to Jos. A. Bank," but also in part to ward off Men's Wearhouse's efforts to buy Jos. A. Bank itself. And this deal structure offers it some important tools in its efforts to say no to Men's Wearhouse.
First: Men's Wearhouse has launched a tender offer for Jos. A. Bank at $57.50 a share. This is not a real tender offer: You can't, like, tender into it and get paid $57.50 a share, because it's conditioned on among other things Jos. A. Bank agreeing to a merger agreement, and Jos. A. Bank doesn't want to do that. But it is a piece of paper that says "tender offer" at the top.
But now Jos. A. Bank gets to offer its shareholders what looks like a straightforwardly better deal: Instead of MW's sort-of tender offer for $57.50, they get this new sort-of tender offer for $65. Like MW's, Jos. A. Bank's tender offer is a little imaginary -- it hasn't launched yet, is conditioned on the Eddie Bauer deal closing, and most importantly is for only 16.4 percent of the company's stock, leaving most of it outstanding at a trading price that is presumably well below $65 and possibly below Mens Wearhouse's bid -- but, again, it's a piece of paper that says "tender offer" at the top, followed by a higher number. So, good work.
That $65 also serves as a convenient sort of an anchor: Even though Jos. A. Bank isn't actually doing anything as straightforward as giving its shareholders $65 a share in cash, it's going around saying that $65 a share, "Reflects management's strong belief in Jos. A. Bank's intrinsic value." So, while Jos. A. Bank can get out of the Eddie Bauer deal if it gets a better offer from Men's Wearhouse, it's created at least a little bit of a record to support rejecting an improved offer, unless that offer is at least $65. And no one seems to think that it will be.
Finally -- if you give Golden Gate 4.7 million shares, and then buy back 4.6 million public shares, you're left with Golden Gate owning around 16.6 percent of the company. While Golden Gate's stockholder agreement does not actually require them to turn down a subsequent hostile bid, presumably Jos. A. Bank's management has sounded them out and found them to be good honest types who would never want their new portfolio company to fall into the evil clutches of a Men's Wearhouse. Which means that even if, by some weird miracle, Men's Wearhouse came back for another try at buying the combined Josie Bauer, there'd be a big chunk of shares in safe hands. So it's just a little bit more protection to make sure that Jos. A. Bank never, ever has to be bought by Men's Wearhouse. Which seems to be the most important thing here.
(Matt Levine writes about Wall Street and the financial world for Bloomberg View.)
The press release says $564 million (and 4.7 million shares), but the purchase agreement says $545 million and 5 million shares (see page 3). The difference is that Golden Gate's ownership is capped at 19.9 percent of the post-tender but pre-Golden-Gate-issuance shares (don't ask whya), or just under 4.7 million shares, so it's adjusted to be more cash and less stock than otherwise agreed. There's also an Ebitda earn-out of up to $50 million payable in like 2015.
If you must ask why, look at Nasdaq listing rule 5635(d), and then ponder in your heart whether the word "transaction" should be read as "transaction or series of related transactions." Myself, I might have let them get away with counting the pre-tender-offer shares? I don't know.
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By the way! A really fun thing for Golden Gate to do would be to get the shares "at $56" and then turn around and tender them into the company's tender offer, making a quick $9 a share profit. Unfortunately the stockholder agreement that Golden Gate is signing prohibits that (see section 1.4).
That's a bolded and underlined sentence in the press release. Usually when you announce an acquisition you don't have to say "We Really Wanted to Do This Acquisition"; that's just implied. When you do, it kind of looks like protesting too much.
Actually it says "Offer to Purchase for Cash," but that's just how lawyers say "tender offer," in one of the rare cases where the legalese is clearer than the colloquial term.
Simplistic math: If everyone tenders, then 16.4 percent of the (non-Golden Gate) shares get taken up, at $65 apiece. So your shares today are worth (0.164 x $65 + 0.836 x [$X]), where X is the post-tender share price, discounted to present value. Using today's intraday high of $55.56, a discount rate of 10 percent, and figuring 3 months until it closes (I dunno), you get around a $55 implied pro forma stock price, hey why not.
It also has to pay a termination fee of $48 million, or about $1.71 a share, if it drops Eddie Bauer to take a better deal from MW or someone else. (See section 9.3 of the purchase agreement.)
On the other hand, if Men's Wearhouse did come back with a $70 bid, it'd be hard to say no, no? Like, the board really did just say that $65 reflected its view of intrinsic value.
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