J. Crew Buyout, An Unfair Price to Many (JCG)

Retail and apparel mergers are still alive and well for good brands.  J. Crew Group, Inc. (NYSE: JCG) is reportedly close to being acquired in a private equity buyout led by TPG Capital and Leonard Green & Partners in a deal valued around $3 billion.  The proposed price that is being reported is $43.50 per share in cash.  While this is roughly a 16% premium to the $37.65 close on Monday, the 52-week trading range is $30.06 to $50.96.

Over the last year, it looks like there were about six different months that J. Crew shares traded above $40.00 per share.  If you go back to its IPO of late 2006 and go into 2008 there were either 16 or 17 months that J. Crew shares traded above $40.00 and it looks like about 7 of those months were above $50.00.

TPG is the former owner and would end up with close to 75% of the company and Leonard Green would own a 25% stake per reports from New York Times and Bloomberg.  The belief is also that the buyout firms plan to work with CEO Millard Drexler with his 5% stake.

A 16% premium may sound like a lot for an overnight pop.  For many shareholders, this won’t be enough.  There will be law firms which initially file inquiries and investigations into whether or not $43.40 is a fair price.  Those inquiries and investigations will likely turn into class action suits thereafter.

Thomson Reuters has earnings estimates of $2.24 EPS for this year and estimates of $2.45 EPS for next year.  That $43.50 generates forward earnings multiples of 19.4 for Jan-2011 and 17.75 for Jan-2012.  Those are premium multiples for many retail and apparel companies on a standalone basis.  The issue at hand is whether far more earnings power can be milked out of the J. Crew chain.

After looking at the numbers, many will refer to this proposed buyout as a lackluster deal. There is an old saying: “An offer is as good as a take.”  That is not always true.

JON C. OGG