Inspecting J. Crew Deal in the MirrorWell this article doesn't make me feel warm and fuzzy about being a shareholder. That is for sure. The question of why does J.Crew have to sell immediately before shopping around is a good one.
By Dennis Berman
November 30, 2010
It may be well-accessorized for the season, but something still looks off about the leveraged buyout of J.Crew Group Inc.
Its $3 billion final price is defensible. And the transaction got all the proper legal sign-offs. Yet as private equity returns to the markets anew, it is important to see the buyers' opportunism at work.
Shareholders, take note of just how conveniently things fell into place for the company's new prospective owners—who happen to include its celebrated chief executive, Mickey Drexler, and its most influential board director, James Coulter. He is a founder of buyout shop TPG Capital, which is paying for most of the deal.
For TPG, the deal lets it put some of its $18.8 billion in cash to work in a company it owned once before. For Mr. Drexler, it's a chance to reinvest a third of the $330 million windfall he has already made as an 11.8% owner of J. Crew. More equity is likely on the way in this current deal, too..
TPG first took J. Crew private in 1997, and after a subsequent public offering, sold its final shares by 2009, clearing seven times its original investment. Still, Mr. Coulter has remained on the board.
Full details of the deal's origins will be released in coming weeks, and representatives for the parties involved weren't willing to comment. People close to the matter say TPG first made its interest known to Mr. Drexler. Under ideal circumstances, a CEO would instantly report this to his board, ensuring it kept full control of any sales process. The less time lapses, the more a board can manage the flow of information, dictate the terms of any offer and set the parameters for a CEO's engagement. That doesn't appear to have happened here.
It all recalls the $11.5 billion buyout of pipeline company Kinder Morgan Inc. in 2007, which was led by Chief Executive Rich Kinder and buyers including Goldman Sachs Group Inc. In that deal, it took two months before Kinder's board knew its CEO was plotting a buyout. Just last week, the company filed for an IPO, which Morningstar suggests will value the company at double its 2007 price.
Indeed, it was a number of days before Mr. Drexler alerted J. Crew's remaining seven board members, say people close to the transaction. They convened a special committee, which in turn hired bankers and lawyers to wrestle over how to proceed. The early days of the process were "messy," says one person close to the deal. The special committee did the best it could under the circumstances, rejecting the buyers' first $41-a-share offer. But TPG and Mr. Drexler, known as a "prince of retail," found themselves in a convenient circumstance.
The company was on track to post lousy third-quarter results. That was expected to hit the stock hard. People close to the transaction thus say the offer is welcome salvation for shareholders, who bought the company expecting growth and now would be paid a premium for their stock.
Another way to look at the $43.50-a-share offer is a way to time a J.Crew purchase at its weak moment. The stock is trading well below its 52-week high of $50.96. Indeed, in the deal's final days, the buyers "retraded" in Wall Street parlance, cutting its $45-a-share agreement at the last moment, says a person close to the deal. J.Crew does have time to find a better deal. And shares continue to trade at a price above the offer, a sign shareholders expect other buyers to materialize.
How shareholders feel may be a waning concern. Mr. Drexler and crew scrapped a planned live conference call last week and played a recorded message instead. It was almost as if Mr. Drexler was patting holders on the head as the company issued a curt, recorded goodbye: "Thank you for your time and interest in J.Crew."
What are your thoughts on this latest news? Are you a shareholder? Do you feel this deal will benefit shareholders properly.