Valuing a Men's Wearhouse-Jos. A. Bank Merger

NEW YORK (The Deal) -- Jos. A. Bank Clothiers JOSB rejected Men's Wearhouse's sweetened hostile offer of $57.50 per share on Friday as undervaluing the company. In doing so, the Hampstead, Maryland-based target may have a point.

By not taking into account Jos. A. Bank's expected Ebitda growth, plus the synergies both companies agree would be realized in a merger, Men's Wearhouse should be expecting to come up with something in the ballpark of $1.8 billion to $1.9 billion.

The bid by Men's Wearhouse gives Jos. A. Bank a market cap of roughly $1.6 billion, based on nearly 28 million shares outstanding, and an enterprise value of about $1.26 billion once the roughly $340 million in cash and equivalents on its balance sheet is subtracted.

The offer also values the retailer at nearly 8.6 times the $145 million analysts estimate the company will generate for the fiscal year ending Jan. 31, according to Bloomberg data.

And it's only about 8 times the nearly $157 million analysts said they expect the men's apparel chain to generate for the following year.

Those valuations are around, or even less than, the kind of prices private equity firms have been paying for clothing purveyors in the past year or so. It's certainly not the kind of premium a strategic ought to be able to pay.

Multiples for mature retailers have reached into the double-digits, as in the case of Saks, which strategic acquirer Hudson's Bay bought in July for $2.9 billion. Saks in that deal achieved a multiple of 11.2 times forward Ebitda and 10.7 times trailing Ebitda.

Private equity firms too, have paid double-digit multiples. Leonard Green & Partners LP and TPG Capital's $2.86 billion deal in 2012 for J.Crew Group valued that retailer at 10 to 12 times Ebitda.

Dutch LLC, the parent company of brands Joie, Current/Elliott and Equipment, sold a stake in the business to private equity firm TA Associates Inc. in Jan. 2013. The deal valued the company at $500 million to $600 million, or around 10 times to 12 times Ebitda, which was roughly in the vicinity of $50 million, according to sources.

At $1.1 billion, Apax Partners LP's deal to acquire Rue21 last year for nearly 10.9 times the $101 million in Ebitda it generated for its fiscal year ended Feb. 2 was one of the richest.

While the Men's Wearhouse valuation of its competitor pays Jos. A. Bank shareholders for the company as it stands, as well as the cash on the balance sheet, it gives shareholders little to no upside.

That upside includes the increase in Ebitda expected to be generated over the coming years by Jos. A. Bank alone, from $145 million estimated for its current fiscal year and $157 million in its next fiscal year, or even benefit from synergies that will be generated.

If one were to use the conservative projection of $100 million (the upper range was $150 million) in annual cost savings cited by both companies in their presentations to shareholders regarding the various proposals for a merger, that should add at least $200 million to $300 million to the market cap.

The increased market cap of $1.8 billion to $1.9 billion would boost the price per share from between $7 and $10, or between $64 and $68 per share.

At that share price Jos. A. Bank shareholders begin to see real benefits from the transaction.

And it's not that shareholders are hostile to the merger - far from it. "The markets have spoken," one industry banker who is familiar with the deal said. "There is no way that this deal doesn't get done," another industry executive who is also familiar with the deal said.

The dealmaking is now down to price.

With Jos. A. Bank's Friday response to the latest offer, emphasizing it as undervaluing the business, Men's Wearhouse may have to make some alterations to its proposal.