Two prominent retailers of men's apparel are about to expand their suit and tie collections with a possible merger. The Men's Wearhouse (NYSE:TLRD) has offered to buy Jos. A. Bank Clothiers (NASDAQ:JOSB) for a cash price of $55 per share, estimating the value of Jos. A. Bank at $1.2 billion. As of Aug. 3, Jos. A. Bank had cash and cash equivalents of approximately $333.2 million and no long-term debt. The takeover price is a 32% premium over Jos. A. Bank's closing share price on Oct. 8, the day before Jos. A. Bank offered to buy Men's Wearhouse.
Men's Wearhouse expects to pay for the deal with available and borrowed cash. The offer came after Eminence Capital, one of several hedge funds that own about 30% of Men's Wearhouse, pressured the company to consider a merger. The offer was made shortly after Jos. A. Bank made an initial offer in early November of $2.3 billion to buy Men's Wearhouse, an offer the company quickly rejected due to its low price.
A combined company would have huge sales
The combined company would create the fourth-largest U.S. men's retailer with more than 1,700 stores and annual sales of more than $3.5 billion, which could raise antitrust issues. For Men's Wearhouse, the proposed acquisition follows the company's $97.5 million buyout of the Joseph Abboud menswear line in July. By acquiring other quality brands, the company seeks to expand and add to its collection of exclusive brands.
According to the forecast from Men's Wearhouse, acquiring Jos. A. Bank would create annual synergies of $100 million to $150 million. These synergies would be realized over the course of three years through efficiency improvements in marketing, customer service, and purchasing. The deal is expected to add to earnings for Men's Wearhouse in the first year after the transaction is finalized .
News of the takeover proposal caused shares of both companies to jump. Shares of Men's Wearhouse rose 7.5% and closed at $50.60, while shares of Jos. A. Bank rose 11% to close at $56.29. Both companies' shares traded heavily during the day -- 10.8 million shares traded for Men's Wearhouse and 8.7 million for Jos. A. Bank .
A combined company could take on department-store rivals
Despite the pressure to merge, the Wall Street Journal reported that those close to the matter believe management may be concerned about how Jos. A. Bank may impact business for Men's Wearhouse. Jos. A. Bank is known for offering deep discounts such as "buy one, get three free" deals and it has had negative comparable-store sales for the past three quarters . In its third-quarter 2013 earnings report, Jos. A. Bank's comparable-store sales decreased 0.1% which showed continued weakness .
In comparison, Men's Wearhouse has posted gains in comp-store sales for 14 consecutive quarters and it has almost three times the operating cash flow of its smaller rival . Despite some of Jos. A. Bank's shortcomings, the merger is considered beneficial for both companies and it should help with cost control in a challenging retail environment. By joining forces they will also be able to better compete with major department stores like Macy's (NYSE:M), which sells both formal and casual menswear.
Men's apparel is one of Macy's more important categories . The company, as well as other apparel retailers, has been in a bit of a slump lately as consumers have focused their spending on home-related goods and automobiles. Macy's had good results during the third quarter, where EPS rose 31% to $0.47 per share over last year. Macy's also did well over the Black Friday weekend as sales of cold-weather apparel and promotional items boosted its results. The company's diversified selection of merchandise is a competitive advantage that can attract both consumers and investors alike.
My Foolish conclusion
The joining of retail forces between Men's Wearhouse and Jos. A. Bank can create a formidable competitor in men's apparel that's better equipped to handle the currently challenging retail sector and its value-focused consumers. Men's Wearhouse gains greater scale with additional stores and other operating efficiencies. Jos. A. Bank gets a much-needed cash boost and rewards its investors by joining a more successful rival.
Eileen Rojas 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.