Activist Would Help Men's Wearhouse Shareholders

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Men's Wearhouse (NYSE: TLRD  ) not only sells suits, but it seems to attract them as well. Recently, the company picked up a near-10% investor in the form of Eminence Capital -- a $4.5 billion activist investment fund with hopes of pushing the suit maker into a merger that, so far, it has shown a strong distaste for. In the meantime, the company is pushing its high-scale strategy in acquiring premium brands such as Joseph Abboud. For investors, the question is whether Men's Wearhouse is pushing pride over logic when it comes to the acquisition offer.

Turned away
Competitor Jos. A. Bank (NASDAQ: JOSB  ) made waves in early fall when it offered $2.3 billion for Men's Wearhouse, only to have the latter's management call the proposal opportunistic and undervaluing the business. The deal, valuing the company at $48 per share, came on the heels of a weak earnings report from Men's Wearhouse that put shares on the skids, prompting the company's management to consider the offer predatory.

Both companies have struggled with less-than-favorable earnings results in recent periods. Men's Wearhouse saw weakness in its tuxedo rental segment (a cash-generating, high-margin dream business) and announced its near-$100 million purchase of premium clothier Joseph Abboud, which is a name much more likely to appear on a display at Saks than at a price-conscious suit slinger. The company was also rumored to be pursuing shoemaker Allen Edmonds, as mentioned by fellow Fool AnnaLisa Kraft, but that deal fell through when that company instead went to a private equity buyer. Jos. A. Bank, on the other hand, is sticking with its strategy of affordable yet fashionable businesswear. At an early glance, it would appear that the companies' strategies are diverging.

As for Eminence Capital, the fund actually agrees with Men's Wearhouse that Jos. A. Bank's offer was too low. But instead of just saying "absolutely not" and pretending the offer never happened, Eminence believes the two retailers joining teams is a great idea -- it just needs a better price tag. The fund has said that it believes Jos. A. Bank will increase its offer if Men's Wearhouse management acknowledges some interest in negotiations.

Come to the table
Men's Wearhouse management presumably is firmly committed to acting in the best interest of its shareholders, but its attitude toward a potential merger seems to suggest otherwise. It is very possible that the two cannot come to an agreement to close a deal, but it should be discussed nonetheless.

A combined Men's Wearhouse and Jos. A. Bank would reduce marketing pressure on both companies, mute the battle for market share, and give the new entity tremendous pricing power in the industry. On the other hand, there appear to be different ideas as to the best direction to take the business (high end and low end), which might create more boardroom drama than is necessary.

Still, the conversation needs to happen for the benefit of Men's Wearhouse shareholders. Things haven't been going particularly well with the company this year, including the ouster of its founder and chairman. As is becoming increasingly popular, an activist investor may prove to be a helpful force in pushing management teams to take action.

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Related Tickers

5/26/2016 4:02 PM
TLRD $13.77 Down -0.25 -1.78%
The Men's Wearhous… CAPS Rating: **
JOSB $0.00 Down +0.00 +0.00%
Jos. A. Bank Cloth… CAPS Rating: ***