Turning suit deal inside out reveals silver lining
By Jeffrey Goldfarb
Thea author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Turning a suit deal inside out has revealed a silver lining. After fending off a hostile bid from Jos. A. Bank, Menās WearhouseĀ is now proposing to buy its smaller rival for $1.2 billion. The estimated cost savings could cover nearly the entire purchase price and the combined company would be less indebted. Structured this way round, the transaction is financially more fashionable.
Jos. A. Bank, a U.S. purveyor of formal, business and casual clothing, put forward a $2.3 billion unsolicited offer for Menās Wearhouse in early October, just months after its quarry had ousted founder George Zimmer. To finance the deal, Jos. A. Bank needed an outside investor and heavy borrowing that would have left the merged entity with debt equal to 4.5 times earnings before interest, taxes, depreciation and amortization. The company withdrew the offer last week after meeting heavy resistance.
With Menās Wearhouse as the buyer, the deal takes on a completely new style. For starters, it would require less leverage ā something closer to 2.8 times EBITDA. That is partly feasible because Menās Wearhouse will utilize some $300 million of cash and equivalents on Jos. A. Bankās balance sheet to pay for the merger.
Second, while Jos. A. Bank didnāt lay out detailed synergies, Menās Wearhouse reckons they could be at least $100 million and as high as $150 million a year thanks to efficiencies in purchasing power, marketing practices and management structures. Taxed and capitalized, at the upper end of the range those would be worth about $1.1 billion, or just shy of Jos. A. Bankās enterprise value.
Both sides clearly think theyād look better paired together. In fact, Jos. A. Bank Chairman Robert Wildrick told the Wall Street Journal last month heād even be receptive to being acquired if Menās Wearhouse would pay the same 42 percent premium as his company was offering. The table-turning bid does that, sort of.
Menās Wearhouse is offering a 32 percent premium to Jos. A. Bankās undisturbed share price, but a 45 percent premium to its enterprise value. Although thatās a bit of a stitch-up, thereās at least enough to work with now to sew up a deal soon.