Monday has been a great day for investors in Men's Wearhouse (NYSE:TLRD) and Jos. A Bank Clothiers (UNKNOWN:JOSB.DL), the country's two largest retailers of men's suits and apparel. Shares of Men's Wearhouse and Jos. A Bank rose more than 2.5% and 4.5%, respectively, after news broke that Men's Wearhouse was initiating a hostile takeover of Jos. A Bank. However, this news might leave investors wondering what exactly is going on and whether there is still money to be made. In an effort to dispel any uncertainty, I provided an analysis of the situation below.
Go big or go home!
On Monday, Men's Wearhouse announced that it would be willing to buy Jos. A Bank shares from investors at a price of $57.50. At this price, Jos. A Bank has been valued at $1.6 billion. This move by the $2.46 billion retailer isn't its first in an attempt to acquire its smaller, but still quite large, rival. Back in November, Men's Wearhouse made an offer to Jos. A Bank's management that valued the company at $55 per share, putting the company's market cap at $1.5 billion.
These two offers followed an earlier offer made by Jos. A Bank to buy Men's Wearhouse last October at a price of $48 per share, putting the entire company's market cap at $2.3 billion. In response to the offer, Men's Wearhouse swiftly declined, claiming that the price wasn't right for the value the company's shareholders would have received. Since then, shares of Men's Wearhouse have risen more than 8%.
Men's Wearhouse sees great opportunity with Jos. A Bank
Given the two consecutive offers made by Men's Wearhouse's management for its smaller rival, investors might be getting the idea that the company initiated the buyout to show Jos. A Bank that it can't be taken lightly. While this isn't out of the question, the more likely explanation is that the company sees real value at Jos. A Bank, whose financial performance over the past few years has been stellar.
Between 2009 and 2013, revenue at Jos. A Bank rose 50.8% from $695.9 million to $1.05 billion. In comparison, Men's Wearhouse has seen its growth come in at nearly half that pace, rising 26.2% from $1.97 billion to $2.49 billion. On a net income basis, the story is quite different. Over the same timeframe, net income at Jos. A Bank has risen a respectable 36.5% from $58.4 million to $79.7 million. This growth rate is significantly lower than the 124% rise in net income from $58.8 million to $131.7 million that Men's Wearhouse has seen.
Looking at each company's net profit margin, we reinforce the idea that Men's Wearhouse and Jos. A Bank are operating in a very different manner from one another. While Men's Wearhouse has seen its net profit margin rise from 3% to 5.3%, Jos. A Bank has seen its contract from 8.4% to 7.6%.
Based on these metrics, the Foolish investor can conclude that Men's Wearhouse has been focused primarily on improving its poor bottom line results through cost cutting initiatives, while Jos. A Bank has decided to forgo heftier margins so that it can grow its top line results. In essence, this trend by both companies represents each trying to become like the other, with the likelihood that both will probably find an equilibrium over time that consists of reasonable growth and margins that aren't terribly apart from one another.
Vital terms for the tender offer
The hostile bid for Jos. A Bank will be conducted by Java Corp., a wholly owned subsidiary of Men's Wearhouse that was set up solely for absorbing the company. For shareholders in Jos. A Bank who tender their shares (i.e. they agree to sell their shares to Men's Wearhouse at the $57.50 price), there are some important things to know. First, any shareholders who agree to sell their shares to Men's Wearhouse will have until March 28, 2014 to do so. It is possible that Men's Wearhouse could extend the expiration of the tender offer, but there are no guarantees.
Second, there is the issue of the poison pill provision that was updated by Jos. A Bank prior to Men's Wearhouse's announcement. In 2007, Jos. A Bank announced the adoption by its board of directors of a shareholders rights plan (aka poison pill) that ensured that a takeover of the company would be difficult to complete. Earlier this month, management amended that agreement to lower the ownership threshold that has to be crossed before the plan kicks in.
In a nutshell, if any investor acquires 10% or more of the company's shares outstanding (down from the 20% that management originally dictated), then all shareholders who have not triggered that 10% ownership event will be entitled to additional shares issued by management. By doing so, the company's share price will fall but the increase in share count will make up for it. The goal of this provision is to ensure that the hostile party trying to buy shares will see their ownership fall lower, making it more challenging to buy a majority stake in the company. On the other hand, the board can waive this trigger in the event that it agrees to Men's Wearhouse's offer.
With only $100.4 million in cash on hand, Men's Wearhouse will likely have to assume a substantial amount of debt if enough investors tender their shares. This, combined with the risk of triggering the 10% threshold specified under Jos. A Bank's amended rights plan, could pose significant problems for the company if it wishes to take it over by force. More likely than not, the company's announcement of the hostile bid is an attempt to woo shareholders into pressing Jos. A Bank's board of directors into approving the buyout.
If the past is indicative of the future and the board's egos are larger than their sense of the company's value, then this scenario doesn't seem likely to come to fruition, but if they believe their constituents are receiving an adequate return for their capital, then investors may have just struck gold.