Jos. A. Bank Clothiers said Friday it plans to buy outdoor retailer Eddie Bauer, a move the company said sets a path for long-term growth and analysts said increases Bank's options as it faces a hostile takeover bid by rival Men's Wearhouse.
The $825 million cash-and-stock deal would give Hampstead-based Bank a once-proud brand that, under a series of owners and through two bankruptcies, has struggled to evolve from an outfitter to a lifestyle apparel retailer.
While Bank seems intent on buying Bauer and remaining independent, some analysts wondered if the proposed deal isn't more about leveraging a larger offer out of Men's Wearhouse.
"Taking over a troubled retailer is a challenging way to think about diversification," said Karyl Leggio, dean of Loyola University's Sellinger School of Business and Management. "My money is still on the fact that Men's Wearhouse is going to acquire Jos. A. Bank."
The agreement calls for Bank to buy Bauer from Golden Gate Capital for $564 million in cash and about 4.7 million shares of new Bank stock at $56 a share.
Bank also offered to buy back 4.6 million of its shares for $65 each, in a deal that would only be consummated if it buys Bauer. The premium buyback is meant to mollify restive shareholders pushing for the $1.6 billion Men's Wearhouse deal.
Bank shareholders are weighing a pending takeover bid by Men's Wearhouse, which last month offered to buy all Bank's outstanding shares for $57.50 each.
"The Jos. A. Bank board of directors reviewed very carefully a number of strategic alternatives in addition to the Eddie Bauer transaction, including a possible acquisition of Men's Wearhouse and the sale of the company to Men's Wearhouse," said Bank Chairman Robert N. Wildrick. "We are convinced that our transaction with Eddie Bauer and the issuer tender offer provide the greatest value creation opportunity for Jos. A. Bank shareholders."
While the Bauer deal might make Bank too expensive for Men's Wearhouse, it includes an escape hatch that allows Bank to terminate the deal, for a fee, if it receives a better, unsolicited alternative.
Men's Wearhouse said Friday it is still reviewing its options.
"They're giving [Men's Wearhouse] an idea of how much more they think it's worth," said Steven Isberg, a finance professor at the University of Baltimore's Merrick School of Business. " 'If you bump up to $65 [a share], maybe we can talk.' "
The back and forth between Bank and Men's Wearhouse started last year, when Bank tried to buy the larger Houston-based retailer. At the time, Golden Gate offered to invest $250 million in Bank to help finance the deal.
Men's Wearhouse rejected the offer and made a counterproposal, which turned hostile last month when it offered to buy shares directly from Bank's stockholders.
In the cutthroat men's suit market, some analysts said, it doesn't make sense for Bank shareholders to pass up the chance to combine forces with Men's Wearhouse in favor of taking on debt to branch out into casual clothing and acquire Bauer, which only recently came out of bankruptcy.
Bank, which on Feb. 1 had about $445 million in cash on its balance sheet and no debt, will finance the acquisition and share buyback with $340 million in cash and almost $600 million in debt.
"I can understand that the management of Jos. A. Bank wants to remain an independent company," said Jerry Reisman, a mergers and acquisitions expert and a partner at Garden City, N.Y.-based Reisman, Peirez, Reisman and Capobianco. "They're doing what's best for them and not necessarily what's best for their shareholders."
Company stock typically tumbles about 30 percent after an acquisition is announced, Loyola's Leggio said. But Bank's shares rose Friday, closing up 20 cents at $55.12 each.
That's a sign that Wall Street doesn't believe the Bauer deal will happen, Leggio said.
Also Friday, Bank said its earnings for the fourth quarter of fiscal year 2013 are expected to fall between $1.04 to $1.10 per share, well below the predicted $1.25. Christmas season sales rose 9 percent compared to last year, but the chain was hurt by bad weather in January, said Bank CEO Neal Black. Overall sales for the quarter rose 0.4 percent.
New York hedge fund Eminence Capital, which owns a 10 percent stake in Men's Wearhouse and about 5 percent of Bank's stock, declined to comment Friday.
Eminence had been pushing for a deal and filed a suit in Delaware to force Bank to consider the Men's Wearhouse bid and block Bank from acquiring another retailer to derail the takeover.
Black said Bank has been concerned that Eminence is "trying to play both sides," and is focused on its portfolio, rather than Bank shareholders as a whole.
"We know of no better offers or other potential transactions that would be better for our shareholders today," Black said. "If something better does appear, the board will do its fiduciary responsibility to consider that."
Isberg said Bank's self-tender offer, which gives a better price per share than the Men's Wearhouse deal, "gives Eminence something else to think about."
"The No. 1 benefit here is they have some flexibility," he said of Bank. "They've created some interesting twists for some of the institutional shareholders."
Combined, Bank predicted the two retailers would have more than $2.1 billion in sales. Bauer sells its goods in about 370 mall-based stores and outlets, as well as online.
The company was established in 1920 as a Seattle sporting goods store by Eddie Bauer. In the 1930s, he patented a regulation badminton shuttlecock that remains the game's standard, then created a quilted down jacket, a design copied today by countless brands. During World War II, Eddie Bauer supplied the military and built a national appeal that he capitalized on as a catalog retail operation.
Bauer retired in 1968 as the retailer began expanding outside Seattle and shifting to more of a lifestyle brand. General Mills bought the growing retailer in 1971, and Spiegel Inc. bought it in 1988. After tumbling into bankruptcy in 2003, Spiegel sold off all assets save Eddie Bauer.
But the new Eddie Bauer struggled, and as the recent recession cut consumer spending, it filed for bankruptcy again in 2009. Golden Gate Capital, which focuses on specialty retail, acquired the retailer at auction.
"We are very proud of what we have achieved by refocusing Eddie Bauer on its heritage in serving outdoor enthusiasts and leveraging innovation and product expertise. We feel confident that our growth and success will continue as part of Jos. A. Bank," Eddie Bauer CEO Mike Egeck said in a statement.
Black said the two companies target similar customers and trade on similar "heritage."
If the deal goes through, Bank and Bauer would retain their identities, with separate headquarters in Maryland and the Seattle area, respectively. Black said growth from the combined companies will lead to net job gain.
"Most customers in the end won't really perceive that we're owned by the same company," he said. "The financial side of it won't be apparent."
Acquiring Bauer would also create $25 million in infrastructure "synergies," according to a Bank presentation for investors. For example, Black said, Bank brings expertise in real estate, but it can learn from Bauer's international presence and brand licensing arrangements.
Bank approached Golden Gate about buying Bauer as early as 2012, Black said, but the San Francisco firm wasn't ready to sell. Unconfirmed reports of the deal surfaced two weeks ago.
At the end of the day, Reisman said the big winner will be Golden Gate, which bought Bauer for $286 million and receives a multimillion-dollar fee, regardless of whether the acquisition goes through.
"Not a bad day's work," he said.
By the numbers
Jos. A. Bank Clothiers
Stores: 629 in 44 states
Employees: 6,342 (in November)
2013 sales: $1 billion
Headquarters: Bellevue, Wash.
Stores: 370 in the U.S. and Canada
Employees: 7,200 in the U.S., Hong Kong and Canada
2013 sales: About $890 millionCopyright © 2014, The Baltimore Sun