RPR&C In The Media

The latest saga involving Jos. A. Bank and Men’s Wearhouse looks like it could force Jos. A. Bank’s hand. Investors have clearly signaled what they want: Ditch Eddie Bauer, and marry Men’s Wearhouse.

After Jos. A. Bank recently said it plans to buy outdoor clothing retailer Eddie Bauer, allowing the company to expand into a new market, Men’s Wearhouse responded with a sweetened offer of a 10% upside to $63.50 a share on Monday.

The offer sent Jos. A. Bank    JOSB     and Men’s Wearhouse    MW     shares up 8.3% and 7.6% respectively. Jos. A. Bank said its board will review the offer and will make recommendation to shareholders in due course.

“The market is telling Jos. A. Bank the transaction with Men’s Wearhouse is favored over the Eddie Bauer deal,” said Cowen & Co. analyst John Kernan in an interview. Jos. A. Bank “will have to think long and hard about it. It’s going to be very hard for Jos. A. Bank to walk away from this. This deal is pretty compelling.”

Kernan said even with the increased bid, Men’s Wearhouse can easily organize financing for the transaction, and that should it go through, the company’s debt  as a percentage of its operating profit, or so-called EBITDA, would still be less than that of a typical specialty retailer.

“They can easily get financing for this,” Kernan told MarketWatch, adding that the jump in Men’s Wearhouse shares signals to investors that “the deal is going to get done,” and the combined company will have significant profit upside.

“There’s well over $5 a share in earnings power for the combined company,” he said, adding that would almost double the $2.75 he estimated Men’s Wearhouse to earn this year with $100 million to $250 million in cost savings expected over three years. “It’s a huge bet on cost synergies.”

Still, the analyst, who doesn’t cover Jos. A. Bank, said he rates Men’s Wearhouse “market perform” because he said there’s “still too much uncertainty.” “It’s in the hands of Jos. A. Bank directors,” he said.

Jos. A. Bank’s offer for Eddie Bauer included an opportunity for it to cancel that deal if the company were to accept a “superior proposal.”

Jos. A. Bank’s “acquisition (of Eddie Bauer) is merely a defensive decision on its part,” Jerry Reisman, a partner at Garden City, New York-based law firm Reisman, Peirez, Reisman and Capobianco, which specializes in corporate mergers and acquisitions and counts several large retailers as clients. “It’s going to be a battle. Jos. A. Bank wants to remain independent. (It’s) using every means possible to prevent the (Men’s Wearhouse deal.)”

Jos. A. Bank Chief Executive Neal Black said in an interview recently the Eddie Bauer deal wasn’t a defensive move. He said while a deal with “Men’s Wearhouse was all about synergies in the short term,” a deal with Eddie Bauer would present new growth opportunities.

“The street likes the combination of Jos. A. Bank and Men’s Wearhouse,” Reisman told MarketWatch. “Collectively the combined entity would make a lot of money. There’ll be tremendous cost savings. It will give Men’s Wearhouse significant buying power when they negotiate with their vendors. They also will have an opportunity to shut down stores in common areas. It’s an opportunity to increase sales and profit.”

He said while Jos. A. Bank’s possible purchase of Eddie Bauer would likely saddle it with debt, Men’s Wearhouse, being a “bigger and stronger” company, has “a lot of financing” behind it.

“If I were a shareholder, I would be very concerned if Jos. A. Bank didn’t accept the (Men’s Wearhouse) offer. It (would be) doing a disservice to me as a shareholder.”

Activist investor Eminence Capital, which owns 4.9% of Jos. A. Bank, said it supports the Men’s Wearhouse deal and said it’s the “best outcome” for all shareholders. Meanwhile, Men’s Wearhouse has filed a lawsuit against Jos. A. Bank, its board and Eddie Bauer owner Golden Gate Capital, which would receive a termination fee if the Eddie Bauer deal is canceled.

“We know what a rational management team and board would do here — take the (Men’s Wearhouse) deal,” said Hedgeye analyst Brian McGough.