J. Crew In Deal With TPG, Green

J. Crew Group Inc. agreed to a $2.86 billion buyout as its sales slump, but some on Wall Street expect higher bids for the U.S. apparel retailer with its devoted following, according to Reuters, publisher of Buyouts.

Under the proposed deal, TPG Group and Leonard Green & Partners LP will buy the company for $43.50 a share, a premium of more than 15 percent compared with J. Crew’s share price before the deal was announced. Millard Drexler, a highly respected merchant who came to J. Crew after years at Gap Inc., will continue as chairman and chief executive officer and maintain a significant equity investment in J. Crew.

TPG first bought J. Crew in 1997 and hired Drexler six years later. It sold its stake after taking J. Crew public in 2006. “It’s still a bargain. You are getting an amazing premium retailer. … You have got Mickey Drexler running the place, and he is gold,” said Patty Edwards, chief investment officer of Trutina Financial, which owns J. Crew shares.

The retailer is allowed to solicit better offers until Jan. 15 next year. If none materializes, it expects to close the deal in the first half of fiscal 2011. “They will aggressively shop it,” said Eric Beder, an analyst at Brean Murray Carret. “I do think other private equity players will look at it. I think you can easily justify a price of $46-plus.”

A higher offer over the holiday season would not be a shock, and shareholders are likely to scrutinize the current deal even more closely as it involves the CEO, according to one retail industry investment banker who is not involved in the deal. Fourth-quarter retail deals are unusual because the buyer tends to want to see how the company performs in the key holiday shopping season, while sellers want to make sure they are getting the best price.

J. Crew’s surprise news may even inspire more private equity interest in the apparel space, including for teen retailer American Eagle Outfitters Inc., which has long struggled to improve sales, and Abercrombie & Fitch Co., a former high-flyer among trendy teens currently in a slump.

“The J. Crew deal underscores our belief that the specialty retail sector is an attractive area for private equity,” wrote Jefferies analyst Randal Konik, citing the above companies. Konik noted that “reasonable valuations, strong cash flows, and top notch balance sheets with many companies in a net cash position” were a draw for private equity.

J. Crew, which had outperformed most retailers earlier this year, may be trying to head off questions over weaker performance during the holidays. The company shocked the market in August when it cut its 2010 outlook, citing “nervous” shoppers and promotions by competitors. It cut its 2010 forecast a second time in November, predicting earnings of $2.08 to $2.13 per share, below its 2009 profit and falling short of a Wall Street forecast for $2.24 per share, according to Thomson Reuters I/B/E/S. It also forecast sales at stores open at least a year would drop in the mid-single-digit percentages during the holiday quarter, and said discounts hurt third-quarter profit.

The private equity group said it secured financing from Bank of America Merrill Lynch and Goldman Sachs Bank USA.

Brad Dorfman is a Reuters correspondent in Chicago. Alexandria Sage, Dhanya Skariachan, Jessica Hall and Megan Davies also contributed to this report.