The buyout is due to complete next year

The buyout is due to complete next year

Private equity buyers have this week agreed to buy US apparel retailer J Crew, with the leadership skills of Millard 'Mickey' Drexler a major selling point of the US$3bn deal.

The multi-channel retailer will be taken over by TPG Capital and Leonard Green & Partners, subject to shareholder approval and the lack of a superior bid.

Analyst reaction suggests that while the proposed buyers are landing themselves a bargain, J Crew has much to gain by going private.

The achievements of J Crew are closely aligned to the work of its chief executive Millard Drexler, who joined the company in 2003. Drexler had a track record of turning around clothing chains, with spells at Ann Taylor and Gap during the 1990s.

Drexler will continue as chairman and CEO and maintain a significant equity investment in J Crew following the proposed buyout.

He says: "As I have always said, we are in this for the long term and we do what we do day in and day out so we can deliver the best possible products to our customers."

Private equity spike
News of the offer follows the $1.8bn buyout of children's wear retailer Gymboree last month by Bain Capital, signalling that private equity firms are circling the apparel industry for potential investments.

Patty Edwards, chief investment officer of Trutina Financial, tells just-style: "Private equity firms have been looking at retail a bit closer during the past year or two. Gymboree was taken over recently and there have been other rumours too.

"These investors can come in and take the retailer out of the limelight. It enables the company to do some work behind closed doors, and means it doesn't have to answer to analysts in the meantime."

Indeed, while J Crew has shown strong sales growth recently, there is room for improvement judging by this week's third quarter earnings results. Despite 4% sales growth, J Crew's net income fell to 14% to $37.8m during the quarter on the back of margin declines.

The $3bn price ,tag for J Crew represents a premium of 29% to J Crew's average closing share price over the last month. Holders of the outstanding common shares of J Crew will receive $43.50 per share in cash should the deal go ahead.

Edwards says: "The valuation was a little bit low but, that being said, I think it will stick. I could have seen a valuation of $50 [per share] because of the company's growth and efforts to get things in line.

"Overall, they are getting one hell of a deal."

The future for J Crew
J Crew was founded in 1983, when its first catalogue was launched, and it opened its first store in 1989 at South Street Seaport in New York City. The retailer now operates 250 retail stores and 85 factory outlet stores in the US.

An initial statement by TPG Capital, which has been a major investor in J Crew for the past 13 years, and Leonard Green & Partners indicates in no uncertain terms that the investors want to expand the business. International expansion and access to new markets would be well facilitated by the company's strong online presence.

Jonathan Sokoloff, managing partner of Leonard Green & Partners, says: "J Crew's strong brand equity and proven multichannel strategy position the company extremely well to expand its business, both in the US and internationally."

Therefore, while alternative bids for J Crew can be tabled up until 15 January, the bidders' understanding with key talisman Drexler means that J Crew is likely to head into the New Year under private equity ownership.

Edwards adds: "Anyone who wants to buy J Crew is buying it because of Mickey Drexler. In order for someone else to take over he has to buy into their vision.

"He has completely turned it around at J Crew."