Leonie Barrie

VIEWPOINT: J Crew buyout comes under scrutiny

By | 24 November 2010

No sooner was the ink dry on the yesterday's announcement of a $3bn takeover deal at apparel retailer J Crew, than a flurry of shareholders began to question whether enough efforts had been made to achieve the highest bid.

The offer price of $43.50 per share from private equity investors TPG Capital and Leonard Green & Partners comes in around 29% higher than J Crew's average closing share price over the last month - and 15% higher than its closing price on Monday (the day before the deal was revealed).

But compare this with another sale that finalised on Tuesday - the $1.8bn buyout of US children's wear retailer Gymboree Corporation by private equity firm Bain Capital - and it's not hard to see why they might feel hard done by. This represented a whopping 57.4% premium to the company's share price less than two weeks before sale details emerged.

Questions are also being asked about the proximity of J Crew's chairman and chief executive, Millard Drexler at the centre of the buyout.

Undoubtedly the retailer's greatest asset, the former Gap CEO has single-handedly transformed J Crew over the past seven years, growing it from 154 to 250 stores, adding the Crewcuts and Madewell chains, and expanding sales. In its last year alone, profit more than doubled to $123.4m.

But while Drexler has promised to continue to lead the firm and "maintain a significant equity investment" in it if the deal goes ahead, he has made no such commitment should a counter-offer emerge. And his absence from any future executive line-up is likely to put off higher bidders.

The timing of the deal is also under scrutiny, coming the same day that J Crew cut its full-year earnings projections as third-quarter profit fell 14% to $37.8m.

Millard admitted on an earnings call he was "disappointed" with the company's performance, and blamed it on softness in the women's retail and direct business. In particular, the retailer has been lumbered with higher-than-expected inventories after its fashions failed to resonate with shoppers - and has had to resort to "a more aggressive promotional posture" to try to clear its misses. Gross profit margin fell 490 basis points to 43.5%.

Against this background, though, it could well be that some shareholders will be relieved with the deal they are being offered. And with substantial resources at their disposal, the buyers are keen to stress their plans to invest in the J Crew's future growth and expansion.

Perhaps mindful of any conflict of interests, a 'go-shop' provision has been negotiated that gives other prospective buyers until 15 January 2011 to enter into negotiations. Crucially, this period includes the key holiday period, which will let them review the retailer's performance during this key time.

Sectors: Apparel, Finance, Retail

Companies: J Crew, Gymboree

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Viewpoint

just-style editor Leonie Barrie shares her thoughts on some of the top stories in the news.

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