After spending hours fussing inside a store, it is hard to walk out empty-handed. So there was no chance that Jos A Bank’s withdrawn bid for Men’s Wearhouse would be the last word in the tussle between the suit merchants. On Wednesday, hedge fund Eminence Capital, which owns a tenth of Men’s Wearhouse, offered its analysis supporting a deal. And while the arithmetic is compelling, how to divvy up the spoils will be the biggest barrier to a deal.
Eminence believes there is $2bn of value to be created from putting the two together. That’s pretty sweet considering the combined market cap of the two was just a shade below $3bn before the bid came in. Assume Jos offers half of that $2bn in synergies to Men’s shareholders in the form of a premium. With 48m shares in issue, that is worth $20 per share and suggests a $55-a-share bid, $7 a share more than the original offer.
But it is worth breaking down the components of the $2bn. Half is from the reliable source of cost-cutting. But the other $1bn comes from the more suspect categories of revenue synergies and expansion of the valuation multiple. The new retailer would have to sell more suits and tuxedos than the total both have forecast to sell. And those new sales and the lower costs would have to attract a higher p/e ratio.
Only crediting the safer cost synergies implies a $45-a-share bid. Anything more has Jos shareholders crossing their figures on revenue bumps and the market bidding up its multiple.
Of course none of this should concern Men’s. Its job is to get the highest offer for all shareholders, including Eminence. But the hedge fund also has a stake in Jos. And if value creation is zero sum then the only question is how it is allocated. Note that Eminence’s stake in Men’s is three times the value of its stake in Jos. The apparent wager is that Jos A Bank snags Men’s Wearhouse but pays richly to do so.
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