And we're off! The news recently broke that Men's Wearhouse (NYSE:TLRD), the $2.44 billion market cap specialty men's retailer, is interested in buying up Jos. A Bank Clothiers (NASDAQ:JOSB). According to the announcement, Men's Wearhouse will acquire its smaller rival for $55 per share if both parties agree, a deal that is valued at $1.5 billion. In response to the announcement, shares of Men's Wearhouse and Jos. A Bank are up 10% and 11%, respectively. In an effort to find out what this means for the shareholders of both parties, let's break down the deal and the impact it would have on all parties involved.
Looking back in time
Although a deal between the two parties would likely be welcomed by investors, it hasn't been terribly appealing to management as of late. In October of this year, Jos. A Bank made an unsolicited bid for Men's Wearhouse at $48 per share, valuing the company at $2.3 billion. For anyone holding shares prior to the announcement, this meant a 36% premium to the company's prior closing price.
Not to be sold out on the cheap, management at Men's Wearhouse claimed that the offer undervalued the company and that it would not proceed with the transaction. In spite of this, Mr. Market believed that something would happen as shares continued to hover between $41 and $48 apiece. Not to be outdone, Men's Wearhouse came through with its own offer to acquire Jos. A Bank.
What's at stake for Men's Wearhouse and Jos. A Bank?
In most acquisitions, there is a win-win type of scenario. One party receives a nice payday while the other increases its market presence. The same can be said of this transaction. Shareholders of Jos. A Bank will be entitled to an 11.1% premium on the closing share price on the day before the announcement, while Men's Wearhouse will add around 600 stores to the 1,137 it already owns.
If the consolidated entity's sales do not change from where they were last year, then the combined entity would have sales of $3.54 billion and net income of $211.4 million. This represents a 32.7% increase from the aggregated sales and an 80.4% increase from the aggregated net income of the two companies seen in 2009. On top of increased sales and a larger bottom line, Men's Wearhouse will be improving its financial position considerably.
As of its most recent quarter, Men's Wearhouse had only $32.5 million in cash and around $600 million in inventory. Though these factors and others like its accounts receivable dwarf the company's current liabilities, its small cash position is worrisome. In the event that business slides, it is possible that the company may not be able to unload its inventory quick enough to meet any upcoming financial needs. This could compel management to sell inventory at a discount and/or to assume debt.
Jos. A Bank, on the other hand, is in a far better financial position. This is demonstrated by the company's $333.2 million in cash and $364.6 million in inventory. It is likely that not all of this cash will stay on the consolidated entity's balance sheet, however. According to Men's Wearhouse's announcement, the deal would be completed through some combination of cash on hand (most of which would have to come from Jos. A Bank itself) and debt.
Based on the initial offer made by Men's Wearhouse, it's not hard to see the upside to shareholders of Jos. A Bank. Likewise, the benefits for Men's Wearhouse are relatively clear. On top of increasing its liquidity, the company will remove a large competitor from the mix and gain additional market power. Through the potential synergies that comes with being a larger player in the market and having the ability to place more pressure on its suppliers, Men's Wearhouse will likely see revenue and earnings continue to climb should the deal go through. This doesn't mean that there aren't risks involved, however.
In addition to being a more leveraged firm from any debt it assumes, the company may not be able to gain the synergies that management foresees. Though the terms of the deal appear reasonable, this could lead to goodwill writedowns (especially if the company is caught by another recession.) It's also possible that, seeing the value of its own brand, Jos. A Bank may demand a significantly higher premium than what Men's Wearhouse is willing to pay. This could send shares down if Mr. Market becomes convinced that an equitable deal cannot go through.
It will be interesting to see what transpires either way. With shares so high right now, however, the Foolish investor might do well to sit by the sidelines and see what happens.
Daniel Jones has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.