Sears Holdings Corp. (NASDAQ: SHLD) and Urban Outfitters Inc. (NASDAQ: URBN) may seem like unlikely companies to get in a bidding war over a rival retailer.  Logic and analysis aside, the Wall Street lore and rumor mills have J. Crew Group Inc. (NYSE: JCG) as being set up for a rival bid challenging the existing $3 billion buyout. Bloomberg has noted that both Sears and Urban Outfitters are reviewing J. Crew’s books and finances, but the word so far is that neither has indicated if an offer is coming.  There may be much more to this story than meets the eye. Possibly much more.

TPG Capital and Leonard Green & Partners LP offered $43.50 a share for J. Crew in November, and CEO Millard “Mickey” Drexler is to stay and maintain a stake in the company. The existing deal on the table has not gone without scrutiny after reports that Drexler had early contacts with representatives of Leonard Green and that TPG was given confidential information about J. Crew in September.  It is a quasi-MBO (or MBO-lite) and the expiration of the go-shop provision is coming up on January 15, 2011.

What is interesting about Sears as a possible buyer is that it did make a similar acquisition in the past when it acquired Lands End, a catalog retail apparel company.  J. Crew was originally thought of as a catalog company.  As of November 23, 2010, J. Crew operated 250 retail stores with the count being 221 J.Crew retail stores, 9 Crewcuts and 20 Madewell stores, as well as the J. Crew catalog business, JCrew.com, Madewell.com and 85 factory outlet stores.

Sears is a company that can use real help to differentiate itself in a fiercely competitive retail environment.  The company recently named apparel veteran Lana Cain Krauter as SVP and president of Sears Apparel.  Her experience is with Bealls Department Stores, J.C. Penney, Goody’s Family Clothing, and at Sears Roebuck in the Women’s Ready to Wear, Intimate Apparel, Accessories and Import teams.

The surprising company on the surface is Urban Outfitters Inc. (NASDAQ: URBN).  It caters to a younger audience with its Urban Outfitters name-brand and it also has Anthropologie, Free People, and Terrain.  It also is in the apparel wholesale business under the Free People and Leifsdottir brands.  Many investors are not as aware of Urban Outfitters’ outside brand initiatives.  It has a market cap of nearly $6 billion today.  The deal would be a game-changer for Urban… Thomson Reuters has estimates of $2.28 billion in revenues for the current January-2011 fiscal year and $2.64 billion in revenues for the January-2012 year.  Add in the estimates of $1.72 billion and $1.87 billion for the same periods of J. Crew estimates and suddenly Urban Outfitters could be a brand powerhouse.

If a rival bid surfaces, J. Crew’s Millard “Mickey” Drexler might find an ouster.  His rise back in the days of Gap Inc. (NYSE: GPS) came to an end after a firing by Gap’s Don Fisher.  If TPG and Leonard Green are not the buyers, Drexler may find himself pushed out again whether he holds a stake or not.

J. Crew shares are up 3.1% at $44.40 today, above the existing $43.50 deal on the table.  Sears is up 1.7% at $72.68 and Urban Outfitters is up 0.2% at $35.97.

The retail and apparel deals continue… and the plot thickens.

JON C. OGG

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