Struggling men's retailer Jos. A. Bank Clothiers Inc. is bidding to secure its future with the $2.3 billion offer it made for larger rival Men's Wearhouse.
Men's Wearhouse spurned the offer, made public Wednesday by Jos. Bank, saying it significantly undervalues the retailer and its potential for growth. But Jos. Bank said late in the day it was undeterred.
Hampstead-based Jos. Bank, known for its deep discounts, is struggling to attract shoppers as it shifts away from such promotional deals on suits and shirts. Its sales and profits have slumped and its stock has languished even as sales of men's tailored apparel have rebounded. In June, it said it would pursue growth through acquisitions.
Men's Wearhouse, meanwhile, has seen sales grow in its stores and recently acquired menswear brand Joseph Abboud.
Jos. Bank said it made an informal offer to buy Men's Wearhouse in mid-September, tentatively bidding $48 a share cash for the Houston-based retailer. Such a deal would combine Jos. Bank's 602 stores with the 1,143-store Men's Wearhouse's chain, creating a men's tailored apparel giant with $3.5 billion in sales that could better compete with department stores.
By making its bid public, Jos. Bank appears to be appealing directly to Men's Wearhouse's shareholders in an effort to garner their support for the deal, said Karyl Leggio, dean of the Joseph A. Sellinger School of Business and Management at Loyola University in Baltimore.
Wednesday's back-and-forth between the two suit sellers could just be the start of negotiations, she said, suggesting Jos. Bank may have been bargain hunting with its first offer.
"This isn't unusual," Leggio said. "There's a lot that could happen. This is the first shot over the bow. There will be more I would expect."
One observer doubts a merger will happen.
"In the end, I don't think it will work out — the deal looks fairly crazy to me," said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based national retail consulting and investment banking firm. "Here you have Jos. Bank, a company in collapse. They've run their own business into a terrible situation."
In an interview Wednesday, Jos. Bank CEO R. Neal Black said the retailer plans to continue to pursue a "friendly" acquisition. Men's Wearhouse stock jumped nearly 28 percent Wednesday, closing at $45.03 per share, while Bank's stock was up 6.4 percent, closing at $44.33 per share.
Jos. Bank's offer represents a 39 percent premium to Men's Wearhouse's 30-day average closing price of $34.51 per share.
"Given the premium to the stock price at Men's Wearhouse, we still believe it is very compelling to the Men's Wearhouse shareholders," Black said. "We're hoping they'll reach out to management and the board to tell them to explore with us the merits of the acquisition. We're eager to enter into discussions with Men's Wearhouse as quickly as possible and pursue a transaction on a friendly basis."
He added that Jos. Bank has no plans to pursue a hostile takeover.
But the premium offered by Jos. Bank's cash offer didn't entice the leadership of Men's Wearhouse.
"The board and management team are confident that continuing our strategic plan will create more value for shareholders than Jos. A. Bank's inadequate, highly conditional proposal," said Doug Ewert, Men's Wearhouse CEO and president, in a statement Wednesday morning.
Later in the day, Men's Wearhouse adopted what is known as a "poison pill" to make an unfriendly acquisition of the retailer more difficult. It established a termporary shareholder rights plan that would allow existing shareholders to buy more shares at a discount if one shareholder buys 10 percent or more of the company's stock.
In a statement late Wednesday, Jos. Bank called Men's Wearhouse's response "inexplicable."
"Our price is significantly greater than the highest price at which Men's Wearhouse's stock has traded over the last five years," the statement said. "The formulaic, knee-jerk rejection by Men's Wearhouse, and their refusal to even discuss our proposal, do not serve the interests of their shareholders or their customers."
But at least one analyst suggested the bid should be higher.
In a research report Wednesday, Stifel Nicolaus & Co.'s Richard E. Jaffe said the proposal is valued slightly less than similar deals in the specialty apparel segment. Jaffe estimated Men's Wearhouse should be acquired for at least $52 per share.
He suggested such a price would make it more of a stretch for Jos. Bank.
Davidowitz questioned Jos. Bank's entire growth strategy. He said its troubles stem from over-aggressive promotions and selling to a squeezed middle class during a weak economic recovery. An acquisition that adds debt is not the solution, he said.
"Here is a crippled company that goes out and decides to buy its much stronger, larger competitor," he said. "Add all of this debt, and it looks kind of crazy to me. They better focus on fixing their own business."
Jos. Bank said it would fund the deal with a mix of cash on hand, debt and a new $250 million investment from Golden Gate Capital, a San Francisco private equity firm that specializes in retailers and restaurants.
Black said the two retailers, which would likely remain separate chains, would fit well together because they sell similar merchandise but cater to different types of consumers.
"Most casual observers might not think that, but that does appear to be the case," Black said. "We consider ourselves to be a classic apparel company. Our products are more traditional and more conservative, and our customer base is slightly older. Theirs is a little more contemporary, a little younger, a little less affluent and a little more forward in styling."
Jos. Bank traces its roots to a Baltimore tailor who established a clothing manufacturing business in 1905. His grandson Joseph A. Bank started as a cloth cutter and later took over the business, renaming it after himself in 1945. The suitmaker mostly sold to other retailers, but started selling out of its factory and began opening other outlets in the 1960s.
Men's Wearhouse is a much younger company, founded in 1973 by George Zimmer, who is known to TV audiences for his advertising catchphrase: "you're gonna like the way you look — I guarantee it." The company fired Zimmer, then its chairman, in June, saying he had pushed to take the company private and demanded to be reinstated as the company's sole decision-maker.
June was a rough period for both retailers. Jos. Bank acknowledged in June that its heavy promotions were no longer as effective as they were in the recession. To jumpstart growth, it said it would boost online sales, market to big and tall-sized customers and open new stores. Its also recently come under pressure from shareholders to boost the stock value.
But the moves came too late for a quick sales turnaround. In its quarter ended Aug. 3, Jos. Bank reported sales fell 11 percent overall and 16 percent in stores open at least one year.
The decline came amid a rebound for men's tailored apparel, with sales for the year that ended in August up nearly 11 percent, according to the NPD Group.
Despite Jos. Bank's troubles, it attracted the support of Golden Gate, which manages more than $12 billion and is invested in such firms as Payless ShoeSource, Eddie Bauer, J. Jill, Pacific Sunwear and California Pizza Kitchen.
The investment firm saw the potential combination of two top men's apparel retailers as "a natural and highly complementary fit that creates a great opportunity for these companies to deliver impressive growth as a result of the transaction," said Josh Olshansky, a managing director at Golden Gate, in a statement released by Jos. Bank.
Two suit sellers by the numbers
Jos. A. Bank Clothiers Inc.
Headquarters: Hampstead, Md.
Sales: $1.05 billion
The Evening Sun
Stores: 623 stores in 44 states
Headquarters: Houston, Texas
Sales: $2.49 billion
Stores: 1,147 stores including K&G and Moores