Turning a suit deal inside out has revealed a silver lining. After fending off a hostile bid from Jos. A. Bank Clothiers, Menâs Wearhouse is now proposing to buy its smaller rival for $1.2 billion. The estimated cost savings could cover nearly the entire purchase price, and the combined company would be less indebted. Structured this way, the transaction is more sensible.
Jos. A. Bank, an American purveyor of formal, business and casual clothing, put forward a $2.3 billion unsolicited offer for Menâs Wearhouse in early October, just months after its quarry had ousted its founder, George Zimmer. To finance the deal, Jos. A. Bank needed an outside investor and heavy borrowing that would have left the merged entity with debt equal to 4.5 times earnings before interest, taxes, depreciation and amortization. The company withdrew the offer last week after meeting heavy resistance.
With Menâs Wearhouse as the buyer, the deal takes on a completely new look. For starters, it would require less leverage â" something closer to 2.8 times Ebitda. That is partly feasible because Menâs Wearhouse will use some $300 million in cash and equivalents on Jos. A. Bankâs balance sheet to pay for the merger.
Second, while Jos. A. Bank didnât detail synergies, Menâs Wearhouse reckons they can be worth at least $100 million and as high as $150 million a year thanks to efficiencies in purchasing power, marketing practices and management structures. Taxed and capitalized, at the upper end of the range those would be worth about $1.1 billion, or just shy of Jos. A. Bankâs enterprise value.
Both sides clearly think theyâd look better paired. In fact, the chairman of Jos. A. Bank Robert Wildrick told the Wall Street Journal last month that heâd even be receptive to being acquired if Menâs Wearhouse would pay the same 42 percent premium as his company was offering. The table-turning bid does that, sort of.
Menâs Wearhouse is offering a 32 percent premium to Jos. A. Bankâs closing share price on Oct. 8, the day before Jos. A. Bank proposed to buy Menâs Wearhouse. But the offer is a 45 percent premium to its enterprise value. Thereâs at least enough to work with to sew up a deal soon.
Jeffrey Goldfarb is an assistant editor at Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.