The Deal: Abercrombie CEO Is Not Going Anywhere

NEW YORK (The Deal) -- On paper at least, Abercrombie & Fitch (ANF), the mall-based specialty teen apparel retailer, is an attractive leveraged-buyout candidate.

But a major hurdle to any deal is CEO Michael Jeffries, who, sources say, opposes a sale of the company and is firmly entrenched, to boot.

Abercrombie now has activist investors agitating for a change at the top, with the aim of selling the company.

Glenn W. Welling, founder of hedge fund Engaged Capital, wrote a Dec. 3 letter to Abercrombie's board calling for Jeffries' removal when his contract comes up for renewal on Feb. 1. Welling wrote that the best option would be to sell the company to private equity, citing reports put out by FBR & Co. analyst Susan Anderson and Randal Konik of Jefferies Group.

Yet, Engaged has only 400,000 shares worth about $14 million at Tuesday's closing price of $35.99 per share. That's not a large stake in a retailer with a $2.75 billion market cap.

The letter also admits that Jeffries is a major hurdle to such a deal.

According to a source familiar with the company, Jeffries has no intentions of leaving the company and still opposes a sale of the company, preferring to remain public.

But other industry watchers posit a scenario where Jeffries, at the vulnerable time of an employment contract renewal would rather take his change-of-control bonus than face a possible showdown with investors. Besides whatever stock option grants he has piled up in two decade-plus run heading up Abercrombie, Jeffries owns slightly more than 1 million shares, a 1.32% stake in his company, according to regulatory filings.

The company did not respond to requests for comment.

A list of the usual suspects among private equity firms that could be interested - and big enough to write a check - include TPG Capital, Kohlberg Kravis Roberts & Co. LP, Blackstone, Apax Partners, Leonard Green & Partners LP and Advent International, although, of those, the last two are the ones likely to have the most interest, industry sources said.

Still, another industry source said Jeffries continues to have the support not only of management, but more importantly, its board.

A recent brouhaha over Jeffries' comments that his brand does not cater to overweight people, among other uncomplimentary reports about his management style and lifestyle, are largely superficial, and have done little to undermine that support or his position at the company, this person said.

For the year ended Feb. 2, New Albany, Ohio-based Abercrombie had nearly $600 million in EBITDA, according to data provided by Bloomberg. For its current fiscal year that will end on Jan. 31, it is estimated to have about $405 million in EBITDA.

Meanwhile, as of Nov. 2, it had cash of nearly $260 million and total debt of only about $200 million.

With a market cap of about $2.75 billion, that equates to an enterprise value of nearly $2.7 billion, or about 4.5 times trailing EBITDA and 6.75 times estimated EBITDA for its current fiscal year.

Retailers in recent months have certainly sold for higher multiples. Neiman Marcus Group Ltd. Inc. was sold to Ares Management LLC and the Canada Pension Plan Investment Board in September for about 9.5 times the EBITDA it generated for the 12 months ended April 27.

And even troubled retailers this year have been able to attract buyers at healthy multiples. rue21 Inc. was picked up by Apax Partners LP in a deal valued at about $1.1 billion, or nearly 10.9 times EBITDA. Meanwhile, Sycamore Partners LLC paid nearly 8.6 times EBITDA for Hot Topic Inc. and TowerBrook Capital Partners LP paid about 7 times EBITDA for True Religion Apparel Inc., according to previous reports.

Plus, Abercrombie has room on its balance sheet to help finance a buyout, with little debt. And private equity-backed companies have been able to pile up debt of up to 8 times EBITDA.

Fellow apparel retailer J.Crew Group Inc., which is backed by TPG and Leonard Green, has total debt that is now nearly $2.07 billion, or about 5.8 times EBITDA, as the company itself calculates it.

Prior to its October initial public offering, Bain Capital-backed Burlington Stores Inc.'s debt-to-EBITDA multiple was nearly 5.3 times, with $1.7 billion in long-term debt as of Aug. 3, and EBITDA of $323 million for the 12 months ended Feb. 2.

Vince Holding Corp., a portfolio company of Sun Capital Partners, had an adjusted EBITDA of nearly $52 million for fiscal 2012, according to a regulatory filing, which means its liabilities were a multiple of nearly 8.2 times trailing EBITDA before its IPO.

Yet, there's no doubting that Abercrombie has been trailing its peers and turning in a poor showing of late. For its third quarter ended Nov. 2, the company reported a net loss of $15.6 million, or $0.20 per share, compared to net income $84 million, or $1.02 per share for the same time the previous year.

Last year, the company reportedly retained Goldman, Sachs & Co., ostensibly to ward off pressure from activist investors, particularly Ralph Whitworth's hedge fund Relational Investors LLC. Not much seemed to come of that, or perhaps Goldman was successful in its advisory role.

However, on Nov. 4, Abercrombie announced that as a result of a long-term strategic review, restructuring plans for its Gilly Hicks lingerie brand would lead to a closing of that brand's stores and a pre-tax charge of about $90 million to $100 million. (The brand will still be sold in Abercrombie's Hollister stores and via its direct-to-consumer business.) Goldman declined to comment.

Still, Abercrombie has seen this show before, where a few poor quarters and a decline in stock price would lead to speculation that it was a buyout candidate for private equity. Yet, nothing has materialized, and Abercrombie would ultimately go on to a turnaround in the very cyclical business of teen apparel.

The source concluded that "it would have to get very ugly," in terms of company performance and mismanagement, and treatment in the press, for Jeffries to be removed.

That means Welling - who was with Relational before setting up his own shop in 2012 - would have to be willing to hang in there if the board re-ups with Jeffries and spearhead a proxy fight.

Since Abercrombie's 2012 annual meeting was in June, the deadline for nominating board members will come up hard and fast after the Feb. 1 date.

By Richard Collings and Paula Schaap

More from Mergers and Acquisitions

Dropbox Soars in Third-Straight Record-Setting Session

Dropbox Soars in Third-Straight Record-Setting Session

Decision on AT&T's Merger With Time Warner Marks a Monumental Week for M&A

Decision on AT&T's Merger With Time Warner Marks a Monumental Week for M&A

JPM's Head of North America M&A Wants to Super-Charge M&A and Hire More Women

JPM's Head of North America M&A Wants to Super-Charge M&A and Hire More Women

Listen: The AT&T Time Warner Ruling and Its Impact on M&A

Listen: The AT&T Time Warner Ruling and Its Impact on M&A

Jim Cramer Reflects on Amazon-Whole Foods One Year Later

Jim Cramer Reflects on Amazon-Whole Foods One Year Later