Preppy fashion retailer J. Crew Group Inc. on Tuesday agreed to be taken private in a $3 billion deal that would be the second multibillion dollar specialty retail buyout launched in two months.
The announcement of an offer from two investment firms — including one that used to own J. Crew — came as the retailer reported Tuesday that its third-quarter net income fell 14 percent, hurt by weaker women's clothing sales. The company also lowered its guidance for the year.
Under the deal as proposed, J. Crew shareholders would receive $43.50 per share from private equity firms TPG Capital and Leonard Green & Partners. That is a 16 percent premium to the stock's closing price Monday of $37.65.
CEO Mickey Drexler, the former Gap Inc. chief credited with turning J. Crew around since coming aboard in 2003, will remain in that role and retain a "significant" stake in J. Crew. He owned 5.4 of its outstanding shares as of September. In a prerecorded call, Drexler called the proposal a "highly compelling offer that will provide J. Crew's shareholders with substantial and immediate value for their shares."
J. Crew shares rose $6.18, or 16.4 percent, to $43.83 during midday trading. The stock has traded between $30.06 and $50.96 during the past 52 weeks. TPG took a majority stake in J. Crew Group Inc. in 1997 and remained majority shareholder until the company went public in 2006. As part of the proposed deal, J. Crew can solicit other offers until January 15, although there is no guarantee the company will get a higher bid, J. Crew said.
Private equity buyouts are rising after a lull during the recession. Gymboree Corp. in October agreed to be bought by Bain Capital for $1.8 billion. That deal closed Tuesday. Marc Cooper, managing director and head of retail at Peter J. Solomon Co., said specialty retailers can be a solid investment for private equity firms because the recession forced retailers to become much more efficient, cut costs and lower inventory. When chains slowed or stopped expanding, that also increased their cash on hand, he said.
"They are fairly stable, have significant cash flow and are trading at a low multiple (of earnings per share)," he said.
"That's a recipe for a perfect leveraged buyout." Gymboree and J. Crew both have "safe, stable, strong management teams," which is reassuring to private equity firms, he said. "Mickey Drexler is a good guy to back." Wall Street Strategies analyst Brian S. Sozzi said J. Crew is one of the more expensive specialty retail stocks. But he agreed that buyers would get a "strong management team led by Mickey Drexler . a productive mall-based store portfolio and a growing outlet business."
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