More than a month after agreeing to sell itself to TPG Capital and Leonard Green for $3 billion, clothing retailer J. Crew may be entertaining bids from several other companies, including Sears Holdings and Urban Outfitters, but these bidders face an uphill battle, according to Matthew Cain, assistant professor of finance in the University of Notre Dame’s Mendoza College of Business, because he says the proposed deal is the epitome of a controversial management buyout (MBO).
“A primary proponent of this transaction, J. Crew’s CEO and Chairman Millard Drexler, negotiated with TPG and Leonard Green for more a month before mentioning it to the rest of the board of directors,” Cain says. “Shareholders also are concerned that Drexler stands to receive a cash-out near $300 million. He will roll over about $100 million of that into the private company of J. Crew, but he’ll still receive a net cash-out of $200 million. Very few bidders are willing to take on management in a potential bidding war.”
In addition, the premium that shareholders will receive in the J. Crew deal is relatively modest compared to other retail transactions in the past year.
“The offer price of $43.50 represents a 30 percent premium over the stock price one month prior, and only a 15 percent premium over its trading price one day before the deal’s announcement,” Cain says. “And that doesn’t compare well to some recent retail transactions. For example, Gymboree shareholders recently received 70 percent premium.”
Cain says unsatisfied shareholders do have some options.
“They can vote down the transaction or hope for a higher bid to come through,” he says. “And, in most MBO deals, we often see shareholder lawsuits, so they can try to delay, and if the deal does close, shareholders who voted ‘no’ can exercise appraisal rights and push for a higher price for the shares they hold.”
Cain conducts research on mergers and acquisitions, corporate governance and financial contracting. Recently, he has investigated the role of investment banks in providing fairness opinions in mergers, the use of contingent “earnout” payments in mergers, and the impact of management participation in private equity buyouts.
Media Advisory: Cain’s comments may be used in whole or in part. He is available for interviews and can be reached at 574-631-1492 or mcain2@nd.edu