In a regulatory filing with the Securities and Exchange Commission on Thursday after the market closed, the firm founded by Stefan Kaluzny said it had accumulated a 9.9% stake and said it wanted to proceed with due diligence to help it value the company for a buyout offer.
Express said in a statement its board had appointed a special committee to determine "a course of action it believes is in the best interest of all stockholders."
While that committee grapples with Sycamore's approach, the retailer passed a poison pill or a stockholder rights plan, causing significant dilution for anyone acquiring more than a 10% stake in Express.
The news of Sycamore's interest sent shares of Express up more than 20% in after-hours trading to $16.55 per share, giving it a market cap of nearly $1.4 billion based on a bit more than 84.2 million shares outstanding as of May 31, the end of its fiscal first quarter, according to company filings. It had cash and cash equivalents of about $250 million and long-term debt of nearly $200 million, which would push the enterprise value up a bit over the $1.4 billion market cap, based on the stock price in after-hours trading.
A 20% to 30% premium over the unaffected stock price tends to be a rule of thumb for retail buyouts. But there have been past instances where the premium can go much higher. Men's Wearhouse (MW), for example, ended up buying Jos. A. Bank Clothiers (JOSB) at a 65% premium.
Over the past 52 weeks, Express has traded as high $25.05 a share, almost double its closing price on Thursday.
Yet, the retailer saw its fortunes decline in the first quarter, with sales falling from about $509 million to nearly $461 million compared to the same period a year prior.
Operating income was almost $15 million, a steep drop from nearly $59 million for the same period a year prior.
Comparable store sales, a barometer used to judge a retailer's health, were down a whopping 11%, according to the retailer. That was after its fourth quarter, in which Express held its own, with same store sales up 1%.
And Sycamore Partners, an industry source said, is a tough bargainer and a disciplined buyer, as it has proven in the past including in its leveraged buyouts of retailers like Talbots Inc. and Jones Group Inc.
Yet Sycamore tends to be more of a hybrid between a PE firm and a strategic. For example, its investment in Mast Global Fashions, an apparel manufacturing sourcing business, is a way to help its other portfolio companies cut costs and improve margins. And that sort of support ability may give it more flexibility when bargaining tuy buy apparel retailers.
In his letter to the Express board Kaluzny noted his familiarity with the company, which in his case, was more than mere rhetoric for shareholders. He was at Golden Gate Capital when the firm bought Express from L Brands Inc. in 2007 for $778 million (the company was then known as Limited Brands Inc.) Golden Gate ended up taking Express public in 2010, raising $270 million in an IPO. (Sycamore also acquired Mast Global from L Brands).
Sycamore Partners is receiving legal advice from Winston & Strawn LLP and Gary Holihan of Gary M. Holihan PC.
Express is receiving financial advice from Perella Weinberg Partners LP's Andrew Bednar, and is receiving legal advice from a Sullivan & Cromwell LLP team consisting of Francis Aquila, Melissa Sawyear, Jinhee Chung and Chenjing Shen.