Prospects for Jos. A. Bank and Men's Wearhouse merger dim

As the prospect of a $1.6 billion merger between Jos. A. Bank Clothiers Inc. and Men's Wearhouse dimmed, investors retrenched Monday, pushing down shares of both retailers much further than the broader market decline.

The market reacted after a weekend in which Hampstead-based Jos. A. Bank rejected a Men's Wearhouse request to negotiate. Bank also raised antitrust concerns in a letter sent Sunday to Men's Wearhouse CEO Douglas S. Ewert, after the Federal Trade Commission questioned the merger.


Amid the dueling takeover bids between the nation's two largest menswear chains, Bank has been exploring other potential acquisitions. Reports surfaced over the weekend about its potential interest in the Eddie Bauer casual and outerwear chain, though Bank has declined to comment on those reports.

Bank's letter accused Men's Wearhouse of lacking "credibility" in its pursuit of Bank. It said Men's Wearhouse turned down Bank's initial $2.3 billion bid for it last year partly because it worried about antitrust issues, but the chain hasn't explained why those concerns don't apply to its own offer.


The most recent developments make an eventual merger of Bank and Men's Wearhouse appear less likely, said Mark Montagna, a senior research analyst with Avondale Partners LLC, a Nashville-based investment bank.

The correspondence between the two chains "sounds like two people in divorce court in an acrimonious divorce, except they never got married," Montagna said. "It seems like such a toxic mixture. I don't know why either company would want to be paired" with the other.

Bank's letter to Men's Wearhouse on Sunday could be posturing, Montagna said, but "when things are acrimonious, it doesn't bode well."

In the first trading session since the weekend's news, Bank shares slid 5 percent to $53.39 a share, while Men's Wearhouse stock's price fell nearly 8 percent to $44.31.

The Feb. 2 letter to Men's Wearhouse, signed by all seven Bank board members, led by Chairman Robert N. Wildrick, said Men's Wearhouse is obligated to alert investors, based on its knowledge, whether the offer can be approved by the Federal Trade Commission.

Men's Wearhouse received a request for additional information on its bid from the FTC on Jan. 28.

Representatives of the Houston-based retailer did not respond to requests for comment Monday.

The government requests more information after an initial notification in relatively few merger cases, said Robert Lande, a professor at the University of Baltimore School of Law who is an expert in antitrust issues.


"Ninety-eight percent of the time, there are no serious grounds for even an antitrust inquiry, so you let it go through, but sometimes the government wants more information," Lande said. "It doesn't mean they are going to challenge it, but it does mean there's a serious question about the merger."

The FTC typically ends up challenging about one in five of those cases, which could mean trying to block the deal or seeking divestments of some stores, he said.

Bank's letter suggested that Men's Wearhouse has additional information to share because Men's Wearhouse said it had expected to receive the second request from the FTC.

"Our two companies' stockholders should understand that second requests are issued in less than 2 percent of all transactions filed with the government, and a high percentage of those transactions are never completed," the letter said. "If you were expecting a second request, why did you not warn investors that this was likely to occur?"

However Stifel Nicolaus & Co. Inc. analyst Richard E. Jaffe said antitrust concerns probably are not relevant to the deal.

Bank's "resistance to the deal is apparent, although it is unclear whether it is based on fundamental concerns or it is posturing to extract a higher bid from MW," Jaffe wrote in a research report Monday.


Jaffe added Bank's possible interest in acquiring Eddie Bauer would add greater uncertainty and risk to the combined company.

"We believe an Eddie Bauer acquisition by JOSB would significantly diminish the appeal of JOSB as an acquisition by MW, which is probably an objective, whether it is authentic interest or merely a ploy," Jaffe wrote.

Montagna said an Eddie Bauer acquisition would derail the merger because Men's Wearhouse "wouldn't want two big headaches on their hands," he said.

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Retail experts have said Bank's combination with Eddie Bauer could benefit both retailers, by offering complementary merchandise and customers for each and room to grow online and into new categories.

Montagna disagreed, saying he doubted the Eddie Bauer chain is profitable and that it likely would come with heavy debt.

"It's a brand that reached its peak in the late '80s and early '90s and has barely survived since then," he said. "It went into bankruptcy. … It's a brand that people under 40 or 45 don't care about. That makes you question the survivability of the brand."


The chain's owner, San Francisco private equity firm Golden Gate Capital, backed Bank's initial $2.3 billion offer last fall to acquire Men's Wearhouse, a failed bid that set off the tug-of-war between the retail chains. Golden Gate also is invested in such firms as Payless ShoeSource, J. Jill, Pacific Sunwear and California Pizza Kitchen.

Private equity firms such as Golden Gate typically try to sell their investments after about three to five years, said Steven C. Isberg, a finance professor at the University of Baltimore's Merrick School of Business.

"The wild card in all this is how much debt would Jos. A. Bank end up assuming," Isberg said. "A highly leveraged transaction for Jos. A. Bank at this point in time may not be a good idea, with the overall outlook in the economy right now."