For nearly a month, shares of Men's Wearhouse (TLRD) have risen significantly. It rose from around $33.30 per share to nearly $46 per share, posting a gain of as much as 38% on the market. The huge increase in share price was supported by the buyout offer from Jos. A. Bank Clothiers (NASDAQ: JOSB), which announced its intention to acquire Men's Wearhouse for around $48 per share in cash. However, Men's Wearhouse has declined the offer, saying that it "significantly undervalues" the business. Is Men's Wearhouse really worth more?
Strategic deal synergies
Investors could be excited when looking at Men's Wearhouse's historical financial performance. From 2003 to 2012, the company has been consistently profitable and generated positive free cash flow. Its free cash flow has fluctuated in the range of $41 million to $111 million during the past ten years. In the trailing twelve months, its free cash flow reached $112 million. Interestingly, the company has achieved consistent profitability without help from leverage. It has more than $1 billion in equity, and no interest-bearing debt. Accounts payable and accrued liabilities are its two biggest liabilities at $137 million and $113 million, respectively.
The combined company would be the national leader in men's apparel and sportswear. It would have generated around $3.5 billion in revenue and $418 million in EBITDA during the past twelve months. The acquisition would enhance the combined company's economies of scale with more than 1,700 stores across North America. In addition, the acquisition would also strengthen the company's omni-channel strategies and give it a larger platform to optimize its real estate footprint. Men's Wearhouse could take advantage of Jos. A. Bank's e-commerce capabilities to drive its sales over the internet. Moreover, the combined company could offer a broader range of formal wear using the foundation of the leading position in the tuxedos market possessed by Men's Wearhouse.
A reasonable offer
At $48 per share, Men's Wearhouse is valued at around 8.3 times its EV/EBITDA, or enterprise value/earnings before interest, taxes, depreciation and amortization. This valuation is a bit higher than the current valuation of Jos. A. Bank. Jos. A. Bank trades at nearly $49.20 per share with an EV/EBITDA of around 7.72. Thus, I think that the offer seems to have a reasonable relative valuation. TJX Companies (TJX 0.83%), one of the biggest off-price apparel retailers, has a higher valuation. At $55.80 per share, TJX is worth more than $39.90 billion. The market values TJX at more than 10.3 times its EV/EBITDA.
However, TJX deserves a much higher valuation. TJX has much greater scale and many growth opportunities in both brick-and-mortar and e-commerce going forward. In addition to launching its own online shopping site, tjmaxx.com, the acquisition of off-price Internet retailer Sierra Trading Post could significantly enhance TJX's e-commerce business with Sierra's strong capabilities regarding internet sales.
A good deal?
The acquisition would certainly leverage the competitive advantages of the two companies including omni-channel retailing, product offerings and e-commerce activities. The deal would leave the combined company substantial debt, with as much as 4.5 pro-forma debt/EBITDA. As the deal did not go through, investors still have a chance to invest in Men's Wearhouse and hold it for the long run. As the company keeps growing and generating increasing free cash flow, its intrinsic value will certainly go up, driving its stock price higher in the future.
