It's beginning to look like there's no end in sight for Men's Wearhouse ( TLRD ) and Jos. A Bank Clothiers (NASDAQ: JOSB). Since last October, when Jos. A Bank offered to buy its larger rival for $2.3 billion, Men's Wearhouse has done everything in its power to devour its smaller competitor. In an attempt to save itself, Jos. A Bank announced in January that it had amended its shareholder rights plan (aka poison pill) so that it would make any hostile takeover very difficult to achieve. Given this higher offer, though, is it possible that a deal might finally come through? More importantly, does a deal at this level even make sense?
Men's Wearhouse is determined to succeed!
This offer by Men's Wearhouse to acquire Jos. A Bank represents the third attempt by the company since last November to make a deal come to fruition.
As we can see in the table above, the company has raised the value of the proposed transaction each time and currently believes Jos. A Bank to be valued at $63.50 per share. Assuming that Jos. A Bank has not materially increased its shares outstanding since its most recent fiscal quarter, the total purchase price for the company would stand at $1.78 billion. This is more than 10% above the previous $1.61 billion offer proposed by Men's Wearhouse.
To make things even better, Men's Wearhouse claimed that it might be willing to pay as much as $65 per share if Jos. A Bank's management agrees to allow it the opportunity to conduct limited due diligence. What this implies is that the company wishes to look over Jos. A Bank's financial statements and operations to see if the combined company would have the quality and create the synergies that Men's Wearhouse believes it is capable of.
Although the deal, if commenced, presents shareholders with a substantial premium to the company's share price, there is one downside. For a deal to go through, Men's Wearhouse made clear that it would require Jos. A Bank to cancel an agreement between it and Golden Gate Capital whereby the latter would sell its Eddie Bauer business to the former for $827.2 million. If completed, the Eddie Bauer transaction would cost Jos. A Bank $564 million in cash, combined with the issuance of 4.7 million shares at a price of $56 apiece.
Is Jos. A Bank even worth the trouble?
For Men's Wearhouse to provide three consecutive offers to Jos. A Bank in such a short period of time suggests that the company couldn't be more serious about acquiring it. But the big question here is why would Men's Wearhouse go so far out of its way to buy up a smaller rival. To understand the company's rationale, we must first look over how each has performed in recent years.
Over the past four fiscal years, Men's Wearhouse has had solid operating performance. Between 2009 and 2012, the company saw its revenue rise an impressive 30% from $1.9 billion to $2.5 billion. Looking at profitability, its results have been even more spectacular. Over this timeframe, the business saw its net income soar 185% from $46.2 million to $131.7 million.
In part, this rise in the company's bottom line has been attributable to its rise in sales. That's not the only influence, however; it has also been due to greater cost efficiencies. During this four-year period, Men's Wearhouse saw its selling, general and administrative expenses decline from 37.2% of sales to 36.5%. Its cost of goods sold posted even better improvements, falling from 58.2% of sales to 55.5%.
While Men's Wearhouse has done well when it came to top line growth, Jos. A Bank did even better. Between 2009 and 2012, the company saw its revenue jump 36% from $770.3 million to $1 billion. Unlike Men's Wearhouse though, Jos. A Bank achieved this growth at the cost of lower profits. Despite rising sales, the retailer saw its net income tick up only 12% from $71.2 million to $79.7 million as its selling, general and administrative expenses kept pace with sales and the company's cost of goods sold rose from 38.7% of sales to 41.7%.
Based on the evidence provided, we can conclude two things. First, Men's Wearhouse seems willing to buy Jos. A Bank for just about any price. Second, by buying the business, it's snatching up a competitor that has demonstrated an amazing propensity for growth, even though it has come with some downside.
More likely than not, Men's Wearhouse is so determined to acquire its rival so that it can grab a larger share of the market, but also so that it can use its resources to make operations more efficient in the hopes that additional shareholder value can be generated. Whether this can or will happen remains to be seen, but it doesn't look like Men's Wearhouse is ready to throw in the towel on its hopes and ambitions.