RPR&C In The Media


Baltimore Sun – Jos. A. Bank Clothiers faces challenges in pursuit of Men’s Wearhouse chain – quote by Jerry Reisman

October 12, 2013 Posted in: RPR&C In The Media


Jos. A. Bank Clothiers Inc. faces a difficult fight in its $2.3 billion quest to acquire rival Men’s Wearhouse, experts say.
And that’s not only because Houston-based Men’s Wearhouse said it doesn’t want to sell out to Jos. A. Bank.

The struggling Hampstead-based retailer went public Wednesday with its bid to merge the two leading men’s tailored apparel chains into a $3.5 billion powerhouse with 1,745 stores. Within hours, Men’s Wearhouse rebuffed the offer as inadequate, then adopted a “poison pill” to deter an unfriendly acquisition.

“Men’s Wearhouse is indicating they don’t have as much of an interest,” said Steve Isberg, an associate professor of finance in the Merrick School of Business at the University of Baltimore. “The first issue is having to deal with the Men’s Wearhouse management. If management does agree to a merger, they will try to squeeze as high a price as they can.”

Bank’s management is vowing to press ahead, calling the response to its $48-per-share cash offer “inexplicable” and making an appeal to Men’s Wearhouse shareholders. Bank’s proposal represents a 42 percent premium over the closing price of Men’s Wearhouse stock Sept. 17, the day before Bank made its offer.

Even if talks resume, challenges lie ahead, experts say. Bank is a smaller company with about $1 billion in annual sales attempting to acquire one about 21/2 times larger. The deal also entails a weaker retailer acquiring a healthier one.

Men’s Wearhouse, the top men’s specialty retailer in North America with $2.5 billion in sales and 1,143 stores, has seen growth for 13 straight quarters in sales at stores open at least a year and recently acquired menswear brand Joseph Abboud. As the next largest men’s retail competitor, Jos. A. Bank has struggled to attract shoppers as the heavily promotional strategy that worked during the recession has lost favor with consumers. Its sales fell 11 percent in its most recent quarter, even as sales of men’s tailored apparel surged in the past year.

But both chains face intense competition from other specialty retailers as well as from high-end and more moderately priced department stores at a time of weakened middle-income consumer spending.

“In any acquisition, one and one needs to equal three,” said Abba David Poliakoff, a partner at the Baltimore law firm Gordon Feinblatt who handles mergers and acquisition. “So in doing this type of an acquisition, there’s got to be some business opportunity that Bank sees, that it’s getting into geographic territories or different market segments or eliminating competition, which would ultimately be a benefit to its shareholders.”

Poliakoff warned, however, that taking on more debt to spur growth — as Bank plans to do — can be risky. There’s also risk in integrating different companies, he said.

“Quite a lot of [acquisitions] fail because of the inability to adequately integrate operations,” he said.

Another expert questioned Bank’s pursuit of a chain with a similar merchandise mix rather than one that would add new market segments. The Limited Brands, for instance, grew by acquiring other specialty chains such as Victoria’s Secret and Abercrombie & Fitch, which was eventually spun off into a separate company, said Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based national retail consulting and investment banking firm.

“I haven’t seen any chain stores go out and buy another chain to duplicate themselves,” said Davidowitz, who traces Banks’ troubles to overly aggressive promotions in a weak economic recovery. “Looks to me like there’s a desperation here. Jos. Bank has to do something because the business is collapsing. It’s not going to fix any problems.”

Yet he and others still see advantages in combining the top two men’s specialty retailers. Bank would have access to Men’s Wearhouse’s customer data through its loyalty program and would have a chance to cross-sell Bank-branded merchandise in Men’s Wearhouse stores, Isberg said.

In a research report Wednesday, Stifel Nicolaus & Co.’s Richard E. Jaffe said such a deal would increase the companies’ scale while offering operational synergies.

“Both stores combined would offer compelling product and great brands across various price points,” Jaffe said in the report, allowing Bank to benefit from Men’s Wearhouse’s strong tuxedo rental business and trendier merchandise. Men’s Wearhouse, meanwhile, would benefit from Bank’s business across various retail channels, including online sales, the report said.

“This would be a very good acquisition, and there would be a lot of synergies,” for the top two players in the specialty men’s apparel business, said one large Bank shareholder, who did not want to be identified because he didn’t want to alienate the company.

The proposal allayed some recent shareholder concerns about Bank attempting an acquisition outside its core business, he said. Still, he doubts the deal’s viability.

“Billion-dollar companies generally don’t buy two billion-dollar companies, and Men’s Wearhouse has rejected it and put in a poison pill,” the shareholder said. “We think there’s a low probability that the deal gets done as it is currently proposed.”

On Thursday, Gilbert Harrison, chairman and founder of Financo, one of the investment banks working on the deal with Bank, told CNBC in an interview that shareholders of both companies support the deal.

“We’ve gotten overwhelming calls from shareholders of both companies totally supportive of this transaction,” Harrison said. “It’s a win-win. Over 40 percent of the shareholders of both companies overlap.”

Bank had no further comment Friday, a spokesman said. And Men’s Wearhouse did not respond to a request for comment.

“If Bank is serious about pursuing it, they will keep at it, and in a pinch, can threaten to go directly to shareholders,” Isberg said.

Jerry Reisman, a partner in the law firm Reisman Peirez Reisman & Capobianco in Garden City, N.Y., and a mergers and acquisitions financing expert, agreed that the proposal could be a windfall for Men’s Wearhouse shareholders. But he said it could be a loss for the consumer, as the two retailers often try to outsell each other through neighboring stores.

Men’s Wearhouse management “hasn’t explained fully why they’ve rejected the deal,” Reisman said. “Management may be trying to stand off this attempted takeover by negotiating with an unknown third party. They may be either negotiating a better deal or trying to protect their position as management of the company.”