A fun exercise is to look at a company being bought out and figure out whether it’s a good deal or not.
Men’s Wearhouse (MW) rejected a buyout offer from Jos. A Bank (JOSB).
A 36% premium just wasn’t good enough because Men’s Wearhouse didn’t even bother to review the details. Instead, MW did what any gentlemanly company would do.
It slapped Jos. A Bank in disgust and immediately implemented a poison pill.
“We are confident that we can achieve total shareholder returns well in excess of what can be derived from Jos. A. Bank’s unsolicited and inadequate proposal,” – Men’s Wearhouse CEO
In response, Jos. A Bank offered this statement.
“The formulaic, knee-jerk rejection by Men’s Wearhouse, and their refusal to even discuss our proposal, do not serve the interests of their shareholders or their customers,” – Jos. A Bank
Was the Offer Really That Disgusting?
First thing to do is a quick reverse DCF or other form of reverse valuation to see what assumptions go into the offer of $48 per share.
With a discount rate set to 9% and TTM FCF of $111m, the growth rate to produce a $48 per share value comes out to 13.5%.
Over the past 5 years, Men’s Wearhouse achieved a median FCF growth rate of 12%.
This was calculated by looking at the FCF CAGR of the following time frames during the last 5 years
- 2008 – 2012
- 2009 – 2013
- 2008 – 2011
- 2009 – 2012
- 2008 – 2010
- 2009 – 2011
- 2010 – 2012
- 2011 – 2013
The median is then taken to smoothen out one time good or bad years and to provide a better normalized value that I can work off.
Do the same thing for the past 10 years and the numbers show that Men’s Wearhouse business has grown in terms of FCF.
However, topline revenue growth is insignificant. Whatever growth strategy Men’s Wearhouse is betting on, it doesn’t inspire confidence.
What is the Fair Value?
Men’s Wearhouse believes the valuation is too low along with several other analysts.
There was a presentation by Jos. A. Bank (I need to find it) in which it says the proposal values Men’s Wearhouse at 8.3 times trailing 12-month pro-forma EBITDA.
I quickly checked Yahoo’s data and at the moment, it’s about 8.7ish. It may vary slightly depending on which data you use.
According to Bloomberg, that’s still slightly less than the median of 8.9 times for deals in the last five years.
The table below is a tiny sample size, but for specialty retailers, the multiple looks right.
So, was the deal really that bad?
I don’t think so. It was a fair price.
Men’s Wearhouse doesn’t have any explosive growth strategies. Sure, growth can increase 2-3%, but to outright reject a bid to pursue low single digit growth doesn’t make sense.
There are numbers floating around suggesting that $55 is the fair price.
Using the reverse DCF again, at $55 per share, expected growth is 15.7%.
Looking at what Men’s Wearhouse has done in the past, this is a premium and not a fair value.
The question is whether Jos. A Bank will pay the premium.
The Past is Important When Valuing for the Future
The common phrase you hear from a lot of growth investors and stock pundits is that “past performance is not an indication of future performance”. In other words, it is foolish to value a company based on what it did in the past.
It’s true for certain situations, but for most companies, including Men’s Wearhouse, it does not apply.
A famous man said this.
“In the business world, the rear-view mirror is always clearer than the windshield.” – Warren Buffett
In your life, think about some high performer that you know or work with. Going forward, do you expect the same type of performance or less?
You expect at least the same. How was that determined?
Answer: by looking at the past performance as an indicator of future performance.
When it comes to business, it’s really just a bunch of people aiming to achieve a goal. As an investor, I tend to think of businesses as brands, buildings, products, intellectual property etc. I need to correct myself a lot of the time and remember that it’s people.
And people have a tendency to do what they did in the past.
Past performance is a good indication of future performance.
The Men’s Wearhouse Arbitrage
Looking at the stock price, traders believe that Jos. A Bank will up their bid. If the market believed the deal to be 100% canceled, then Men’s Wearhouse should trade close to its stock price before the bid.
This has created as arbitrage opportunity if you want to take a chance to guess whether the deal is still on or not.
My last one with the InfuSystem buyout turned out to be wrong and it goes to show how difficult early stages of merger arbitrage can be.
(For those wondering whether I still hold INFU, yes I do and I’m not in the least bit worried about the price action.)
View the Men’s Wearhouse Valuation Spreadsheet
As a supplement to everything I’ve written here, the PDF below contains the reverse DCF numbers as well as other fundamental data.
Cheap, Fair or Premium?
What do you think?
Is the deal cheap, fair or a premium for Men’s Wearhouse?