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Men's Wearhouse - Jos. A. Bank Strike a Deal

Zacks Equity Research

The tussle between men’s apparel retailer Jos. A. Bank Clothiers Inc. (JOSB) and its larger rival The Men’s Wearhouse Inc. (MW) that dragged on for almost 6 months has finally come to an end as both the companies sealed a merger deal. Per the deal, Men’s Wearhouse will acquire all shares of Jos. A. Bank in an all-cash transaction of $65.00 per share or $1.8 billion. Men's Wearhouse has extended the expiration date of its tender offer to Mar 19, 2014.

At $65 per share, the deal values Jos. A. Bank at a 56% premium over the closing price on the day prior to the announcement of Jos. A. Bank’s proposal to buy Men’s Wearhouse (Oct 8, 2013) and a 65% premium to Jos. A. Bank's unaffected enterprise value, providing substantial value to Jos. A. Bank shareholders. It also represents a 10.0x enterprise value to the trailing 12-month adjusted earnings before interest, taxes, depreciation and amortization (:EBITDA) multiple.

While the Jos. A. Bank shareholders gain on value quotient, the Men’s Wearhouse shareholders will gain from estimated annual synergies of $100 – $150 arising from the merger of the companies over the next three years. Moreover, the transaction is projected to be accretive to Men’s Wearhouse’s earnings in the first full year.

Fulfilling the conditions of the deal, Jos. A. Bank has terminated its deal to acquire Everest Holdings LLC, the parent company of Eddie Bauer with immediate effect and withdrawn its previously announced issuer tender offer of buying back $300 million of its common stock.  

The combination of the two companies is expected to create a behemoth men's apparel retailer with over 1,700 stores in the U.S., about 23,000 employees and a pro forma sales of $3.5 billion. The merger will combine the complementary businesses of both companies, creating the fourth largest men’s apparel company with increased scale and breadth, catering to a wider customer base.

Men’s Wearhouse plans to fund the deal using its available cash flows and a committed debt financing from two reputed banks – BofA Merrill Lynch, a wing of Bank of America Corp. (BAC) and JPMorgan Chase & Co. (JPM).

The deal has received unanimous approval from the board of directors of both companies, while it awaits other customary approvals, including expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Act.  The deal is expected to be completed by the third quarter of 2014.

Markets reacted positively to the finale of the much-hyped tussle of recent times with the shares of Men’s Wearhouse surging 4.7% and Jos. A. Bank climbing 3.9% during yesterday’s trade.

The Background Story

The ‘tug of war’ between Jos. A. Bank and Men’s Wearhouse began in Oct 2013, when Jos. A. Bank had proposed to buy Men’s Wearhouse for $48 per share or a total of $2.3 billion cash.

After rejecting Jos. A. Bank’s proposal, Men’s Wearhouse turned tables by initiating a takeover bid of $55 per share or a total of $1.2 billion to acquire all shares of the former on Nov 26, 2013. Following a rejection, on Jan 6, 2014, Men’s Wearhouse, holding a Zacks Rank #4 (Sell), raised its acquisition bid to $57.50 per share or $1.6 billion in order to woo Jos. A. Bank and its shareholders.

Men’s Wearhouse left no stone unturned to facilitate a merger with Jos. A. Bank. However, on Jan 20, Jos. A. Bank rejected Men’s Wearhouse’s $1.6 billion offer stating that the bid is inadequate and significantly undervalues the company on grounds of its near- and long-term prospects.

In the meantime, in Feb 2014, Jos. A Bank penned an agreement to acquire Everest Holdings LLC, the parent company of Eddie Bauer. Later in the month, Jos. A. Bank initiated an issuer tender offer to acquire up to 16.4% (4.6 million shares) of its common stock for about $300 million. Apart from the $300 million in tender offer, the company agreed to pay about $564 million in cash to buy the lifestyle brand, Eddie Bauer.

However, Men’s Wearhouse made a cash offer of $63.50 per share along with a proposal to further sweeten the bid to $65.00 per share in late February. While, Jos. A. Bank rejected the company’s $63.50 per share offer, it agreed to opening talks with Men’s Wearhouse, given the latter’s willingness to further raise its bid following limited due diligence.

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