Monday, February 24, 2014

The Jos A Bank- Men’s Warehouse-Eddie Bauer: Poison Pill or Suicide?

Ralph has discussed the agency Problem whereby management acts in its own self interest against the best wishes of shareholders. The current Joseph A Bank -Men's Warehouse- Eddie Bauer ménage a trios provides a vivid example of managers acting badly. The sequence of events is as follows:

1)  October, 2013: Bank offers to acquire its larger competitor Men
2)  November, 2013: Men proposes to acquire Bank for $57.50 per share
3)  December, 2013: Bank rejects Men’s offer
4)  January, 2014: Men begins a hostile takeover of Bank offering $57.50 per share-about a 40% premium to Bank’s pre October price
5)   February, 2014: Bank makes a combined offer to acquire Eddie in a combination cash-stock deal worth $825mln. The $300mln stock portion values the shares at $56 per share. It also offers to repurchase $300mln of its shares at $65 per share. The new offer represents a 52 % premium over Bank pre October price.
6)   February, 2014: Eminence Capital, 4.9% Bank shareholder, objects to Bank’s actions threatening a proxy battle and legal action.
7)   February, 2014: Men revises its offer to $63.50 per share with a further increase to $65 if it is allowed due diligence. The revised offer is conditioned on Bank terminating the Eddie offer. Men offers to cover the Eddie breakup fee up to $48mln. Eminence supports the revised offer.

Both Bank and Men agree the combination makes sense in the slow growth men’s apparel industry. The only issue is which management team survives to run the combined firm.

Bank decided to make itself so ugly that its unwanted suitor would lose interest and their jobs would be safe-shareholders be damned. Here is what they did and it is pretty ugly:

1)  Purchase Price multiple (PPX): They offered a 14X trailing EBITDA for an ill fitting Eddie that had earlier been bought out of bankruptcy by Golden Gate Capital. The going retail PPX is around 8X.
2)  Funding: The share portion of the consideration leaves Gate as Bank’s largest shareholder at around 17%. Bank is borrowing $900mln-$400mln bridge loan and $500mln ABL-arranged by Goldman who is also Bank’s advisor. This will leave Bank in a leveraged state with reduced flexibility.
3)  Share Repurchase: The repurchase is justified as reducing the dilution from the share portion of the consideration. What is especially interesting is they are issuing shares at $56 per share while repurchasing shares at $65. Selling shareholder will benefit at the expense of the remaining shareholders.

This is almost like giving yourself VD to scare off an unwanted lover-the ultimate poison pill I guess. Nonetheless, I would hope there would be less painful alternatives.

The end result is a blatant case of management agency costs at work. Bank management not only failed to capitalize on a favorable buyout offer-made even more favorable by the revised Men offer. They are also attempting an overpriced acquisition with limited synergy potential, which would leave the Bank in a weakened financial state. Just when you thought it could not get any worse, they decided to make an overpriced share repurchase. They should get an award for attempting the shareholder value destruction trifecta. Oh well, what do they care-if they get to keep their jobs. Hopefully, for Bank shareholders, the new Men offer will save them from such actions.


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