Wednesday, November 24, 2010

J Crew Agrees to $3 Billion Takeover

According to FT, JCrew the US retailer with a preppy style, has agreed to be acquired by TPG Capital and Leonard Green & Partners in a $3 B deal.
PE firms are rushing in to cherry pick strong brand retailers with good prospects for overseas growth outside North America. TPG for example, has respected retail assets in Europe and Middle East which brings more confidence into their ability to grow internationally.
Thanks to cheap and abundant debt, PEs typically load a retailer with significant debt to pay for first dividends. They also sell off any real estate as part of the initial restructuring, which gives them strong return on invested capital as well as return on equity.
The deal for a brand favored by Michelle Obama, the first lady, is the second private equity transaction in the US retail sector in as many months.
It follows Bain Capital’s $1.8 B acquisition of Gymboree, the children’s retailer, which was finalized on Tuesday.
The two funds have agreed to pay $43.50 per share in cash for J Crew, representing a premium of 29% to its average closing share price during the past month.
The shares jumped 16.1 per cent to $43.72 shortly before the deal was announced.
The deal would return J Crew to the control of TPG, which ran the retailer as a private company between 1997 and its initial public offering in 2006. The deal would give TPG 75% of the company, with Leonard Green holding the remainder.
J Crew is led by Mickey Drexler, one of the most highly regarded figures in US fashion retailing, who led Gap’s rise to dominate the retail landscape in the 1990s.
After leaving Gap suddenly in 2002, he was recruited to lead a restructuring at J Crew, which began as a catalogue business in the 1970s. Mr Drexler is a colorful figure at the retailer, who regularly links his mobile phone into the loudspeaker system at the group’s New York headquarters to keep staff abreast of his design ideas and thinking.
He successfully repositioned the retailer as an upmarket brand and expanded it to include a children’s store and Madewell, a separate youth denim brand.
The chain operates more than 320 stores and had sales last year of $1.7B. It recently launched its first men-only and bridal stores, as well as an e-commerce site for its Madewell brand.
Paul Lejuez, retail analyst at Nomura Securities, said that both the J Crew and Gymboree deals involved retailers that were performing well but had potential for growth, rather than underperforming stores in need of a turnaround.
“The pattern, if we can call two announced deals a pattern, has been to acquire good businesses,” Mr Lejuez said. Gilbert Harrison, chief executive of Financo, a retail focused investment bank, said that TPG would take J Crew “to a next stage that I have to assume would involve the roll out of the platform to the rest of the world”.
J Crew has no stores outside the US but is set to open its first store in Canada next year and plans to expand its e-commerce operation internationally. Gymboree recently opened its first stores in Australia.
The deals are seen as a further sign that private equity firms increasingly regard the stock market as good value and are attempting to take advantage of cheap debt.
Mr Harrison said he expected to see further private equity interest in retail buy-outs.
The two private equity groups have financing from Bank of America Merrill Lynch and Goldman Sachs, who also advised them on the bid.
J Crew was advised by Perella Weinberg.
It is not the first time TPG and Leonard Green, a smaller Los Angeles buy-out firm, have teamed up to buy a company they had owned in the past. They previously jointly invested in Petco, the pet supplies chain, which they exited and then jointly invested in a second time during the credit boom that ended three years ago.
The repeat deals are seen as a further sign that private equity firms increasingly regard the stock market as good value and are attempting to take advantage of cheap debt.
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