While the ink's barely dry on the agreement signed by Men's Wearhouse (TLRD) to take over Jos. A. Bank (NASDAQ: JOSB), the real winners seem to be the private equity firms that were the actual puppeteers manipulating the merger of the two retailers.
A preeminent player
On one hand is Eminence Capital, which first backed Bank's bid to take over Men's Wearhouse, but then switched allegiances when hunted became hunter and Men's Wearhouse went on the attack. Jos. A. Bank all along said the only reason the hedge fund was trying to force the issue, such as suing the men's retailer in court earlier this month, was because of the large bet it had placed on getting the deal done.
With a 4.9% stake in Jos. A. Bank, Eminence sees the value of its position growing to around $89 million, not to mention the value of the near-10% position it still has in Men's Wearhouse.
Not burning any bridges
On the other hand is Golden Gate Capital, the PE firm that owns outdoors gear retailer Eddie Bauer, which Jos. A. Bank had agreed to buy for $825 million in a bid to thwart its rival's advances. It was spelled out in that merger agreement that if someone (e.g., Men's Wearhouse) came along with a higher takeout offer, Bank would pay Golden Gate $48 million as a breakup fee, certainly nothing to sneeze at for something that was probably not going to happen anyway.
Although there was some sense in Bank bidding for Bauer in that it could offer diversification away from just men's suits into outdoor apparel, as well as women's and children's clothes, it was speculated that, right from the beginning, the whole purpose of the proposal was to wrangle a higher offer out of Men's Wearhouse.
After all, it was Golden Gate that had been in on Bank's original buyout offer, agreeing to underwrite that deal. So when Men's Wearhouse turned the tables with its Pac-Man defense, and first offered $55 a share and then $57.50, having a side deal on hand that would be troublesome for Men's Wearhouse if it didn't fork over even more money seemed like a pretty shrewd negotiating tactic. In the end, Men's Wearhouse bumped up its offer first to $63 a stub, and finally to the $65 per share that both sides settled on.
In the end, Golden Gate Capital's assist gave Jos. A. Bank shareholders an additional $210 million to pocket from the increased offers that Men's Wearhouse made -- not a bad return for their $48 million "investment." Had the deal gone through, the PE firm would've ended up owning nearly 17% of the retailer's share, and could have earned an additional $50 million in cash based on Eddie Bauer's adjusted earnings for fiscal 2014.
A private affair
Or so it said on paper. Now it has a pocketful of change, a still valuable retail asset, and all the time in the world to sell the company to a new bidder if it so chooses. Both private equity companies come out winners, as do Jos. A. Bank's common investors, who gain extra value because of the hard stance management took.
The longer-term question is, will it pay off for Men's Wearhouse's shareholders, who now have to watch the company digest the acquisition through a transition phase? At best, the men's retailer is fairly valued, and I'd be loathe to hold the stock as it enters a period of uncertainty.
