What Men's Wearhouse and Jos. A. Bank Need to Sort Out

By the middle of February, it looked like the Men's Wearhouse (NYSE: MW  ) and Jos. A. Bank (NASDAQ: JOSB  ) deal was dead in the water. Bids had been scoffed at, venomous letters had been exchanged, and to cap it all off, Jos. A. Bank had gone out and bought Eddie Bauer. Then, out of the blue at the end of last month, Jos. A. Bank announced that it was still willing to consider a bid from Men's Wearhouse, even as it turned down a $63.50-per-share offer. That was Thursday last week, and today, Men's Wearhouse announced that it had entered into a non-disclosure agreement with Jos. A. Bank, paving the way for further merger talks. Color me surprised.

What the Men's Wearhouse NDA means
The most notable announcement in the NDA release is that Men's Wearhouse is prepared to offer Jos. A. Bank $65 per share. Jos. A. Bank just turned down a $63.50-a-share offer, with the board unanimously calling it inadequate and not in shareholders' best interests. Right now, Jos. A. Bank is trading at $62.50, so a $65 offer would represent a 4% bump in the company's valuation.

While Men's Wearhouse has said that $65 isn't out of the cards, it's all contingent on what the company discovers when it looks into Jos. A. Bank's books. The NDA allows Men's Wearhouse to look for additional value in the Jos. A Bank business, giving it access to more information. While it may seem one-sided, the benefit is clear for Jos. A. Bank -- it can get a better price.

Today's NDA came with a draft merger agreement from Jos. A. Bank, meaning that the search for value should be relatively quick. If Jos. A. Bank has offered up a draft agreement, it's going to have highlighted some of the business areas that offer the combined firm extra value, giving Men's Wearhouse a good idea of where it needs to investigate as things progress.

How Eddie Bauer changes the equation
One of the biggest unknowns in the potential merger is what Eddie Bauer means for Men's Wearhouse. Men's Wearhouse has been chasing Jos. A. Bank because the two businesses have a clear overlap. Eddie Bauer fits into that mold less clearly, offering a broader product range to a similar customer. All three brands focus on a squarely middle-class customer, but Men's Wearhouse and Jos. A. Bank focus on the work clothes of those customers, and Eddie Bauer offers women's clothing as well as men's.

In Men's Wearhouse's $63.50 offer, it said that it was making the bid based on the condition that the Eddie Bauer agreement be terminated. In its most recent release, that condition did not come up -- at least in public. Men's Wearhouse clearly doesn't see the value of Eddie Bauer to its business, but it also seems willing to look for that value as it assesses Jos. A. Bank's books.

For Jos. A. Bank shareholders, acceptance of the $65 bid would be a nice bump in value. For Men's Wearhouse, it would mean an expanded reach and a broader product base, helping the business grow and solidify its core customers. From a pulled-back perspective, this deal continues to make a lot of sense. The only concern I have is how Eddie Bauer fits into the whole thing. While I can see the value that the brand adds, it also feels shoehorned into the combined business. I wouldn't be shocked if Eddie Bauer became the sticking point that keeps this merger from happening right now.

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