The Men's Wearhouse (NYSE:TLRD) and Jos. A. Bank Clothiers (UNKNOWN:JOSB.DL) have been caught up in a hostile takeover battle for nearly six months. It all started on Oct. 8 when Jos. A Bank made a bid to acquire its much larger rival, Men's Wearhouse.

Men's Wearhouse refused the offer, and counter offered to take over Jos. A. Bank; Jos. A Bank has been fighting against such a deal ever since. Then, on Feb. 24, Men's Wearhouse again upped its bid for Jos. A. Bank to $63.50 per share in cash from $57.50 per share. The company has also said it will pay up to $65 per share cash if allowed time to perform due diligence and talk with management of Jos. A. Bank. Men's Wearhouse stipulated that the target company must respond to the offer by March 12.

With all of this going on, which companies stand to win and lose? 

Jos. A. Bank's point of view
Upon receiving a bid from Men's Wearhouse for $57.50 a share, Jos. A. Bank's board of directors strongly suggested against shareholders taking this offer. On Feb. 14, the board then went on to announce the purchase of retailer Eddie Bauer for $825 million in cash and stock while simultaneously announcing a tender offer to buy back $300 million worth of shares at $65 per share.

Jos. A. Bank's management painted a very rosy picture with this bid to acquire Eddie Bauer, including the following estimates for the combined company:

Year

2014 estimated

2015 estimated

Revenue

Greater than $2.1 billion

Greater than $2.2 billion

Adjusted EBITDA

$255 million-$265 million

$325 million-$340 million

EPS

$3.20-$3.40

$4.65-$4.90

Jos. A. Bank currently sports a trailing-12 month earnings before interest, taxes, depreciation, and amortization of $133 million and earnings per share of $2.29; as you can see these numbers would be a vast improvement.

With a market cap/EBITDA ratio of 12.5 and a P/E of 26.2, this could mean the following: a share price of $83 at year-end according to the low end of the earnings estimates; a share price of more than $110 according to the low end of the EBITDA guidance. So why are shareholders even considering The Men's Wearhouse's bid?

Fact checking
Jos. A. Bank announced this mess of a transaction right in the thick of the takeover bid from Men's Wearhouse. The company made the press release sound like the two events were totally independent of one another, but anyone not living under a rock could see past that.

I don't believe Jos. A. Bank's management in any way lied or anything of that nature; however, they may have used very optimistic expectations when computing these numbers to help sway shareholder opinion.

In the press release, Jos. A. Bank estimated that Eddie Bauer had 2013 revenue of around $890 million and EBITDA of between $61 million and $65 million. Combining that with Jos. A. Bank's trailing-12 month revenue of slightly more than $1 billion and EBITDA of $133 million, the company is assuming top-line growth of 11% on the low end and synergies helping EBITDA grow by 29% in 2014.

I believe that if the future of a Jos. A. Bank and Eddie Bauer merger were that bright, managers would have pulled the trigger on it long ago.

Men's Wearhouse's position
After Jos. A. Bank attempted to fend off Men's Wearhouse by the Eddie Bauer deal, Men's Wearhouse upped its bid to $63.50 per share, or $65 per share if Jos. A. Bank lets Men's Wearhouse conduct due diligence. The $63.50 per share price represents a 52% premium to the closing price on Oct. 8, right before all of this began, and a 15% premium to the closing price on Feb. 21, before the offer was announced.

I believe an acquisition at this offering price would represent substantial value for both companies' shareholders.

Jos. A. Bank shareholders would receive a certain $63.50 or $65 for every share owned, a price substantially higher than they could have imagined getting at this point in time without an acquisition. Given the unknowns surrounding the Eddie Bauer deal, and management only offering to buy back approximately 17% of the shares for $65 per share, this could be a perfect opportunity to cash out.

Men's Wearhouse shareholders would then in effect have paid around $1.8 billion and own a combined company that would have produced revenue of $3.5 billion in the last 12 months. The addition of Jos. A. Bank would add a higher-growth company  -- revenue has grown 13% a year over the last decade compared to Men's Wearhouse's 6% growth -- with higher margins too.

The purchase price, whether financed through debt or new equity, should not scare off investors in Men's Wearhouse. The combination of these companies would help raise earnings and margins, as the rivals would no longer have to compete on price. Also there would be substantial synergies, which are hard to estimate; but at the price paid, it appears to be a good deal.

The bottom line
The bottom line is, if these companies merge, there could be many riches ahead for shareholders. However if this deal falls apart, both companies may see their stock prices crumble to levels not seen since before merger talks began, which would hurt everyone involved.

I believe this offer represents substantial and fair value for both parties involved and shareholders could benefit by owning both companies. If other shareholders of Jos. A. Bank see it this way, you could earn a quick profit from owning these shares and own a piece of what would be a great company moving forward for years to come.

 

Jacob Meredith and clients of Appalachian Capital Group, LLC have no positions 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.