In an interesting turn of events, just a month after Eddie Bauer Holdings, Inc. (NASDAQ:EBHI) gained listing on the Nasdaq, the company announced it's being taken private. The company agreed to be bought by an affiliate of Sun Capital Partners, Inc., and Golden Gate Capital. In 2005, Eddie Bauer emerged from bankruptcy as the sole operation of SpiegelInc.'s 2003 Chapter 11 reorganization.
The proposed deal to acquire Eddie Bauer is for $9.25 per share in cash and assumption of $328 million in debt for a combined enterprise value (EV) of $614 million. With Eddie Bauer's $1 billion in sales over the past 12 months, this translates into an EV-to-sales of 0.6. And getting an operation for 60% of sales is quite a deal, assuming the problems can be fixed.
Compare this proposal to Sears', now Sears Holding Corporation's (NASDAQ:SHLD), purchase of Land's End. Sears paid 1.2 times revenue, or $1.9 billion, for Land's End back in 2002. Now, Eddie Bauer's revenues peaked in 1999 at $1.6 billion and are currently $1 billion for the last 12 months. However, even if the Land's End purchase turns out to be expensive, Eddie Bauer's price tag based on sales has a significant discount built in.
I can't believe management doesn't also think the current deal is cheap. Eddie Bauer emerged from bankruptcy with a market capitalization of roughly $865 million, with another $300 million of debt creating a $1.2 billion enterprise. At $1 billion in sales, Eddie Bauer began trading at roughly 1.2 times sales, similar to the buyout price of Land's End. However, since last June, shares of Eddie Bauer have fallen significantly and the private equity firms are offering to pay less than half of the original enterprise value.
To drive the point home, consider whether Eddie Bauer can be returned to profitability. Gap (NYSE:GPS), which has had its own struggles lately, has modest 8.8% operating margins and trades at a EV-to-sales ratio of 0.9. If Eddie Bauer can generate those same operating margins, the share price based on a similar multiple of sales would translate into almost $20 per share. Compared to a retailer with peak operating margins and strong growth, such as American Eagle OutfittersInc. (NASDAQ:AEOS), which trades at a lofty 2.5 times sales, the potential share value of Eddie Bauer could go significantly higher.
The bottom line is that if Eddie Bauer can be fixed and profitability restored, private equity could be getting quite the steal.
For related retail Foolishness:
American Eagle is a Motley Fool Stock Advisor selection. Gap is both a Stock Advisor and anInside Valuerecommendation.
Fool contributor Matthew Crews appreciates your feedback -- really! He has a financial position in America Eagle. The Motley Fool has an ironclad disclosure policy.
