By Agency Reporter

Wednesday, 24 Nov 2010

NEW YORK: J. Crew Group Incorporated, the New York-based clothing retailer, is close to an agreement to be bought by TPG Capital and Leonard Green & Partners for about $2.8bn, according to two people with knowledge of the matter.

TPG and Leonard Green would pay $43.50 a share in cash, or 16 per cent more than J. Crew‘s closing share price of $37.65 on Monday, said the people, who declined to be identified because the matter is private. The deal may be announced as soon as Tuesday and could still fall apart, the people said.

TPG, a former owner of the retailer, and Leonard Green, according to Bloomberg on Tuesday, would work with Chief Executive Officer, Millard Drexler, the people said.

J. Crew, whose clothing has been worn by first lady, Michelle Obama, has dropped 16 per cent this year, making the stock undervalued, said Wall Street Strategies Incorporation’s Brian Sozzi.

”They see many retail stocks up on the year, but J. Crew is stuck in the mud,” the New York-based analyst said today in an interview. ”The hope is that you‘re getting strong intangible assets. In J. Crew‘s case, that‘s Drexler and his team.”

J. Crew reported sales of $1.58bn in the year ended January, twice its revenue seven years ago, when Drexler took over.

The company, which operates 250 retail stores under brands including Madewell and 85 factory outlet locations, is scheduled to report results on Tuesday.

The clothier‘s stock rose as much as 22 per cent at 7:45am in early trading after closing at $37.65 on Monday on the New York Stock Exchange.

Its year-to-date gain compares with a 25 per cent gain for the Standard & Poor‘s Midcap Consumer Discretionary Index.

Heather McAuliffe, a spokeswoman for J. Crew, did not respond to an e-mail or phone call seeking comment. Drexler also didn‘t respond to an e-mail. The buyout was reported yesterday by the New York Times and the Wall Street Journal.

An agreement with TPG would still allow J. Crew to solicit other bids past the holidays, one of the people said.

J. Crew lowered its full-year earnings forecast in August, citing ”economic uncertainty.” It has been expanding with specialty boutiques in Manhattan and a bridal line.

”We are going to see more consolidation in the retail industry, especially in developed markets where there‘s a need to clear excess capacity,” Bob Parker, senior adviser at Credit Suisse Group AG, said, adding that, ”Strong growth in the future is going to come from emerging markets.”

The offer price for J. Crew implies a price-to-sales ratio of 1.72, according to data compiled by Bloomberg.

That compares with the ratio of 4.43 at which LVMH Moet Hennessy Louis Vuitton SA acquired a 17.1 per cent stake in Hermes International SCA last month, according to the data. Japan‘s Fast Retailing Company took Link Theory Holdings Company private last year in a deal that had a price-to-sales ratio of 0.47.

TPG Capital previously acquired an 88 per cent stake in J. Crew in 1997, according to data compiled by Bloomberg. The retailer held an initial public offering in 2006 after hiring former Gap CEO Drexler in 2003 to turn the company around.

 

Source: Punch