Yesterday I wrote a piece predicting that, assuming it goes through, the Comcast (CMCSA) deal to purchase Time Warner Cable (TWC) would turn out to be a good thing for buyers of CMCSA. The dilution that will result from this all stock deal caused CMSA to drop significantly yesterday, but, in the long term I believe this deal will benefit the company through improved bargaining power and economies of scale. If so, CMCSA will be following a well worn path for takeover aggressors... a dip on the news then subsequent strength.
However, this doesn't mean that I love it every time a big player acquires a competitor. Some dips are fully justified. The market’s initial reaction to such announcements usually depends on an analysis of how the deal is structured but, over time, why it came about can be just as important. Sometimes, as with CMCSA and TWC, there are obvious synergies and it is simply a case of expanded market share and one less competitor to worry about. In other words, it makes commercial sense. Sometimes, however, a move looks to be motivated by something other than profit maximization. Take Joseph A Bank (JOSB)’s acquisition of Eddie Bauer, for example.
Now it could be that, after careful consideration, JOSB’s board have decided that the Bauer brand, which was at its peak popularity in the 80s and 90s, is going to acquire some kind of retro chic and boom again. Call me a cynic if you will, but I doubt it. What seems far more likely to me is that this acquisition is motivated by one of two things, either of which would indicate that it is a bad deal. This could have been announced as a bargaining chip in a long running takeover saga, or it is action for the sake of action.
In order to understand either one, you have to be aware of the recent history of Joseph A Bank and its dealings with Men’s Wearhouse (MW). In October of last year, shortly after the ouster of MW’s founder and Chairman, George Zimmer, JOSB announced a takeover bid. To bring together two big retail brands in a consolidating industry that is recovering from a huge consumer recession would seem like a good idea in a general sense, but MW’s board didn’t see it that way. They treated it as a hostile approach and refused to cooperate.
Then, a few weeks later, Men’s Wearhouse announced a “tit for tat” attempt to buy out Bank, who responded with an improved bid etc, etc with, I think, the last announced move being by MW, with an offer of $57.50. This has been an unedifying battle to say the least, and has had the effect of making what seemed like a sensible merger into a circus that has me, and I’m sure many others, questioning the wisdom of both boards.
It is with this backdrop that JOSB has announced a deal to buy Eddie Bauer, or rather the brand’s holding company, Everest Holdings, from private equity firm Golden Gate Capital in an $825 Million cash and stock deal. The Joseph A Bank board has reserved the right to withdraw from this deal should an offer come along that is more beneficial to shareholders, an obvious reference to the potential for a resurrected deal with MW.
If that is designed to put pressure on MW and force a better offer, though, it is a very risky tactic. If Men’s Wearhouse decide to walk away, JOSB is likely to be left buying what in England we call “A pig in a poke.” It is not that they haven’t done due diligence, I’m sure, but buying what is generally perceived as a slightly tired, 80's brand smells like “I don’t care what you do, but do SOMETHING!” The numbers don’t even look that great. $825 Million represents about 16.5 times last year’s earnings of $50 Million for Bauer. If a brand was on the upswing, that would be a good deal, but I think Eddie Bauer’s best days are in the rear view mirror.
A good deal is one where both sides benefit, but I get the feeling that, when the dust settles and assuming that MW doesn’t increase their bid, Golden Gate Capital will be delighted by their side of this one, while JOSB will be left asking themselves “What did we do that for?” Joseph A Bank is indicating a lower opening this morning, but that may be just the beginning.