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Jos. A. Bank's Potemkin Village?

By Rich Duprey - Feb 28, 2014 at 3:41PM

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A judge seems to think the men's clothing retailer erected a facade to throw its rival off the scent.

Is the acquisition of Eddie Bauer by Jos. A. Bank (NASDAQ: JOSB) a real opportunity for diversification and growth or simply a ruse to thwart Men's Wearhouse's (TLRD) takeover attempt of its men's suits rival?

Its fortuitous appearance amid the escalating and nasty battle between the two publicly traded clothiers certainly lends credence to Men's Wearhouse's plaint that it's merely a sideshow to throw roadblocks in its path, but Jos. A. Bank says, nonsense; the Eddie Bauer acquisition would be immediately accretive to earnings, with additional substantial gains realized in 2015 and beyond, and would diversify its clothing offerings into outdoor wear and women's clothes. It's actually a chance for new growth.

However, a judge hearing the case filed by Men's Wearhouse against its rival seems to be siding with Men's Wearhouse. Although he's still allowing the Bank-Bauer deal to move forward, earlier this week he said he wants the men's clothier to expedite to him submission of documents relating to the acquisition, noting, "The allegations of the complaint, taken as a whole, create a colorable basis to believe that the features of the Eddie Bauer transaction are such that in their totality they may well fall outside the range of reasonableness."

Steven M. Davidoff, writing for the New York Times DealBook page, has previously argued that Jos. A. Bank might have some legal standing, harkening back to a period when Time Inc. was being sought by Paramount, but effectively blocked it by entering into an arrangement with Warner Communications that created something like a poison pill defense. In making the separate deal as Bank is doing with Eddie Bauer, Time became too big and leveraged to acquire.

Although Paramount sued, Time adequately made its case that there were business reasons behind its deal, so despite Paramount's offer being superior, the court upheld the maneuver and today we have Time Warner. As Davidoff writes, "The decision upheld the principle that company boards could make acquisitions, even ones that blocked competing offers, with relative impunity. Shareholders could do nothing to stop it."

The hinge pin in Jos. A. Bank's favor seemed to be the clause it inserted allowing it to back out of the deal if someone else tried to acquire it with a superior bid. That should have at least given the appearance it was doing more than simply trying to stand in the way of Men's Wearhouse, but the judge's words don't suggest he's buying it.

Neither side got what they wanted with the ruling. Men's Wearhouse wanted the Bauer deal blocked; that didn't happen. Jos. A. Bank didn't want to relinquish documents related to the acquisition, but now it has to do so, pronto. 

It's not the end of the drama, as Men's Wearhouse raised its offer once more to $63.50 per share, yet with the judge setting a March 25 hearing date on Men's Wearhouse's motion to permanently block Bank from acquiring Eddie Bauer, we'll finally get insight into whether the deal was just a facade to extract better terms from its rival or whether Jos. A. Bank was too smart by half and a clever trick is ultimately what trips it up.

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