Tuesday, January 25, 2011

J.Crew's Buyout Leaves Some Questions

With J.Crew's deal to go private almost complete, there are still some lingering questions. "Thanks!" to many of you, including WellFedFred, who shared the following news. The article below is from the Wall Street Journal (click here to read in its entirety):
The Lesson of J. Crew: To Err is Human. To be Forgiven…Doesn’t Cost Much
By Ronald Barusch
January 21, 2011

The J.Crew board process was, as I have said before, a disaster. So it is not surprising that in the settlement with the plaintiffs’ lawyers, of whom I am equally skeptical, the buy-out group of CEO Mickey Drexler, TPG, and Leonard Green actually had to give a bit up…just not too much. And of course, ... the outside directors who also made mistakes didn’t have to pay anything.

To briefly recap, the deal was hatched by two directors behind closed doors. They waited weeks to tell their fellow directors They got a huge head start by sharing corporate secrets with no confidentiality agreement. Even when the outside directors engaged, they seemed to panic and pushed to sign the deal up quickly—before the all-important holiday sales season. And that allowed the buyout group to threaten to walk away and reduce its bid, blaming the company for disclosing bad news at the last minute.

This week, J.Crew announced that although holiday season revenue was higher, same store sales were down more than 6%. Apparently the board was pushed into the deal because it was nervous about whether Drexler could tackle that problem.

J.Crew tried to fix everything with a “go-shop”—but that was flawed as well... The management group discouraged other bidders by, among other things, insisting on matching rights. This meant even if a new party came up with a better deal it would probably lose when the management group matched. So not surprisingly the go-shop expired last weekend with no one coming to the party.

Meantime those plaintiffs’ lawyers were likely developing an unusually good case. Why? Because under Delaware law the TPG deal would probably have been scrutinized under an “entire fairness” standard. And that means not only did the price have to be fair, but the process had to be “fair dealing” as well. Maybe with enough expert witnesses J.Crew could argue the price was okay, but, as I have said, J.Crew and TPG were vulnerable in trying to establish fair dealing.

Other terms [in the settlement] included a $7 million reduction in the breakup fee, an extension of the go-shop period, a non-compete from Drexler if he chooses not to go with a new bidder, some expenses for a competing bid to the extent the matching rights remain, a majority of the disinterested shareholders vote requirement (it may sound good, but the insiders don’t own much stock in this deal) and a whole lot more of relatively inconsequential stuff.

But don’t get your hopes up that the extended go-shop is going to have any different outcome. The company is now shop-worn and a buyer still has no assurance of getting Drexler.

One more meager victory that settlement wins for shareholders: J.Crew (or its insurers) is going to pay its shareholders $10 million at the closing of the deal. Don’t spend it all in one place. It works out to about 15 cents a share. My guess is that is included just to assure a plump legal fee to the plaintiffs’ lawyers. They will be paid separately, but the lawyers can argue they are entitled to at least 30% of this additional value they created for shareholders. I suspect they will ask for more than $3 million though given all those monetary concessions.

But here is the bottom line: The many mistakes which were made cannot be undone. What really were the options here for moving forward? J.Crew shareholders have a deal on the table for $43.50 per share in cash–plus that extra 15 cents. And that for a stock that was trading at $37.65 prior to the deal with the company about to announce it was missing its numbers. Was it ever realistic to expect a court to enjoin such a transaction and leave shareholders without the option of a deal?

Sometimes, even when there are mistakes, there are no good or fair solutions. And the shareholders still have a choice: Once the go-shop is over it will be up to the shareholders to decide if they want the $43.50 deal or if they would prefer to send the directors back to the drawing board.

And speaking of the shareholders’ decision, the excitement may not be over. Mason Capital, an investment fund, filed a Schedule 13D on Tuesday saying it owned 6.5% of J.Crew. Mason Capital says its purpose is investment, but it bought all of its shares at prices above the $43.50 deal price—some of them as recently as two weeks ago. TPG and Leonard Green could have a fight on their hands even if they thought they had cleared away their obstacles with this settlement.
This article sums up the history behind the deal and all the hurdles (to put in nicely) along the way. A couple of things stuck out for me: (1) It's amazing that Mickey Drexler has so much pull with J.Crew that they (the board and investing firm) are worried about losing him. (2) J.Crew shareholders are really the getting the short-end-of-the-stick here. They are basically going to get less per share than its worth–plus that extra 15 cents from the settlement.

Honestly, I think we will still be hearing more about this deal.

What are your thoughts on this latest news? Do you think there will be anymore hiccups now that J.Crew is on the path to privatization? Do you think going private is still the right move for J.Crew?


  1. I agree Alexis that share-holders are losing out because some of you paid higher back in the day, but it seems to me that the stock price is going downhill (in the near future, especially if J Crew discloses more same-store losses) so the $43 might be a good compromise. I really feel that Mickey should be held accountable for the company's troubles instead of walking away with millions, but as they say, life ain't fair.

  2. Here is another analysis of MD's high-handedness (if that's a word) and the JC Board's laissez-faire attitude:


    Some JCAs have suggested that the purpose of the buyout is to allow MD to give free rein to his creative impulses. If so, this is simply in violation of uncountable laws and regulations, and this is not the forum to enumerate them. A publicly owned company is obligated to deal fairly and openly with its owners - no inside deals, no over- or under-payments, and so on. Shoppers can shop elsewhere if they don't like what they see. Not so easy to tell shareholders to dump their stock at an unfavorable price if they don't like management. If a manufacturer is not making money, it's not because there is creative frustration in the executive suite. It's because the public is not buying the cars, or the pots, or the shovels, or the feathered miniskirts.

    And certainly if sales are down and markdowns are up, maybe the compensation committee should take a long hard look at the formula used to compute bonuses. Oh, no, better idea -- what if we go private so we won't have to have a comp. committee?

    In the current clearance sale I snapped up the things I'd been watching as happily as any other JCA, so I'm not complaining about that. But I am wondering about what JC will have to do to pay the costs of the buyout, and the effect this will have on its long-range business plans.

    Oh, good Lord, my word verification is "gapspecter."

  3. Certainly interesting. Thanks for continuing to post articles about this, WFF!

  4. wellfedfred,
    gapspecter, lol! quite the portent.

  5. So really what we've learned is that as long as the price is "fair" publicly traded companies can get away with closed-door dealings. Snort. With no financial penalties attached to the breach of ethics, can we really expect businesses to go about things any other way?

  6. Thank you Alexis and WFF for the articles. This subject absolutely fascinates me. I think MD has capitalized completely on the JC shareholders blind faith and adulation, (equatable to the People Magazine fascination with Jennifer Aniston), and this has enabled him to get away with a whole great big bunch of stuff. I'm sorry, but all along I've felt that JC's downward spiral the last two years was ever so slightly scripted. I just don't see how anyone that has been in retail for as long as MD has can not understand that when you offer your former loyal to the death customers recycled ruffles, abysmal quality and pander it at an increased price point, your company will suffer and your stock price will go down. I imagine he's a little surprised at the stir the deal seems to be making, but I'm sure he's trying to charm and pep talk his way out of it. It will be interesting to see what the Delaware contingency decides because I think such business behavior could definitely set a bad example and needs to be reigned in. Also, I really don't think another buyer will come forward during the revised go shop period. Who would want to get into this mess?

  7. Well, he's the merchant prince. The company would no doubt fall apart without him, and I'm not being facetious.

    It seems they run things behind closed doors the same way they run their business externally -- haphazardly, inconsistently and frequently in a way that makes no sense at all.

    Damn, damn, damn. Why can't someone else make clothes I like better? I stay for the clothes. Not because I want to, but because I like so little else from other retailers. Can't be running around in threadbare duds or (gasp) nekkid.


  8. agree Elaine, I wish someone else would make clothes I like better too, and at a price point my wallet can tolerate.

  9. @ Elaine, I think you hit the nail on the head. MD does seem to be the only one in the whole of JCrewdom that seems to have the comparative trappings of the Moses they need to lead them out of the wilderness. As for running their business, for the love of Mike can't one of y'all offer his/her software skills in lieu of free clothing for life in order to bring that wheezing website into the modern era of wishlists and fabric contents? (I would try to swing such a deal right now with Dear Wheeler-and-Dealer except I ain't got no skills.) And lastly, this is completely OT, but on the subject of nekkid, if we would all start showing up that way at the airport, maybe the airlines would stop charging us for bags as well as eliminate the need for pat downs by the poor souls in airport security.

  10. @David, LOL! Pictuing myself streaking through my local airport wearing a wide, Miss America-style sash that says I'D RATHER GO NEKKID THAN GIVE J CREW ONE MORE DOLLAR! :)

    But seriously, the sad thing is, there IS technology out there that could fix all of these woes and save the company a bundle. I know because my company makes it, and while I'm on the marketing side of the house, the Retail part of our business is one of my internal clients. I know how all the software works.

    The thing is, it's not cheap. And the implementation can be a total bear. But always, always, always in the end, the company streamlines processes and saves a ton of money, giving it more resources to redirect to other parts of the business.

    And believe you me, if I ever catch Dear Wheeler-Dealer off-guard IRL, I'm going to give him a piece of my mind. I think someone needs to, and the people surrounding him are loathe to do it for fear of making him angry.

    I imagine it would be like telling Steve Jobs you have issues with the iPhone. lol!

  11. I bet once the deal goes through, we will see all these changes (website updates, inventory management, etc.) relatively soon as a "proof" that being taken private is a change for the better.

  12. We've already seen what MD's creative juices can produce. Now we need to just reel him back in and let the traditional voices speak. MD can't seem to get off the GAP/BR wagon as far as quality and style goes.

    He's a shady character. He's expanded stores, and he's closed them. He's shunned mark downs, now he's delayed the Feb rollout because he's too busy marketing us with his "SHOPNOW" 40% off campaigns. What gives? He doesn't want to be a discount retailer, but his clothing doesn't warrant anyone paying full price. I'm scoffing at the merchant prince.

  13. This is interesting stuff. Thanks for sharing the articles and info wellfedfred and Alexis. Curious to see what direction they take after the buyout.

  14. Has anyone else noticed the new "J" in the J.Crew logo? Any news on the reason for such?


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