Will Express Lead to Other Retailers Being Snapped Up?

NEW YORK (TheStreet) -- Analysts are already speculating that more retailers will be heading down the M&A rabbit hole following news private equity firm Sycamore Partners, had purchased a 9.9% stake in Express (EXPR) with intentions to acquire the teen retailer.

The Sycamore filing, announced last night in a Securities and Exchange Commission filing, will "lead to a search for the next potential M&A candidate in specialty," Wedbush Securities analyst Morry Brown wrote in a June 12 research note to clients. "We note the most attractive candidates are likely to screen in the bottom half of the group on valuation."


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Based on the ratio EV/EBITDA, (enterprise value divided by earnings before interest, taxes, depreciation and amortization), Express is the cheapest stock based on that ratio at 3.6 times, according to the Wedbush note. Other cheap retailers on Wedbush's list include: American Eagle Outfitters (AEO) at 4.9 times EV/EBITDA; Guess (GES) at 5.4 times; and Abercrombie & Fitch (ANF) at 5.8 times, Chico's (CHS) at 6 times and Ann Taylor (ANN) at 6.3 times, and Francesca's Holdings (FRAN) at 6.8 times.

Express, American Eagle, Abercrombie and even Francesca's cater to the teen and early twenties-aged clientele.

The retail industry has been challenging in recent quarters as consumers refrained from purchases as a result of poor weather, lack of compelling product and an increasing move toward online purchases through Amazon (AMZN), which many traditional retailers have been slow to adopt, and cheaper options at discount retailers like TJX's (TJX) TJ Maxx and Marshalls. Consumers are also still hurting from a lower discretionary spending, a reduced willingness to take on credit, and -- in the teen sector specifically -- teens preferring to spend what money they do have on their Apple (AAPL) iPhones and accessories.

Private equity has already been sniffing around the sector eager to grab underperforming stocks. Andrew Burns, an analyst at D.A. Davidson, notes "depressed valuations and operating performance" in the teen retail space will continue to make the niche an interesting area for private equity. "It appears more teen retailers will go this route in 2014," Burns wrote in an email, using Rue 21 (bought by Apax Partners) and Hot Topic (also acquired by Sycamore) as two examples of retail PE deals in 2013. While he wouldn't speculate on any names, "at current valuation levels most publicly-traded teen retailers are potential targets," Burns said.

That said, as long as teen retail operating margins continue to decline, PE firms may stay on the sidelines, says Brian Sozzi, CEO of Belus Capital Advisors and contributor to TheStreet. "Quarter after quarter we are receiving earnings warnings. When those warnings become less severe I think then would be the time to ponder activity entering the space for a concept that continues to be viable," Sozzi said in an email to TheStreet.

"I sense private equity will watch businesses underperform in the near-term," Sozzi went on to say. "I would be looking to mid-2015 as perhaps when activity could intensify, after we get those spring reports and before back to school/holiday."

Another reason why there may not be any immediate teen retail M&A - activist investors are already chomping at the bit in some of these names. Sycamore, which also owns Talbots, Hot Topic, Nine West, among others and just last month its $150 million debt financing for Aeropostale (ARO).

Abercrombie has been dealing with its own activist investor, Engaged Capital. Last month Abercrombie named four independent directors to its board after it came to an agreement with Engaged Capital, which had originally sought to bring in new leadership to replace CEO Mike Jeffries.

As for American Eagle, chairman and shareholder Jay Schottenstein, who engineered CEO Robert Hanson's removal earlier this year, intends to attempt a turnaround of the ailing retailer. The Schottenstein family owns a large stake in American Eagle, according to The Deal, a sister publication to TheStreet.

Why Express?

Shares of Express were surging 20.7% to $16.35 at last check on Friday as investors cheered the news of a possible buyout.

According to a letter that Sycamore's managing director Stefan Kaluzny sent to Express' board of directors, the stock purchases demonstrate the private equity firm's interest in acquiring the company. "With the cooperation of the company's board of directors, we would like to perform confirmatory due diligence to determine a definitive valuation of the company and submit a binding, fully financed proposal to acquire all of the remaining common stock of Express not owned by Sycamore Partners," the letter said.

Kaluzny points to Sycamore's familiarity with Express leading to an acquisition proposal that will benefit all of the company's constituents, including shareholders, customers, vendors and employees. "Given the strategic and operational challenges faced by specialty retailers generally and the company in particular, a fully financed, binding, all cash offer to acquire the company would be a valuable alternative for the company's board of directors and stockholders to consider," the letter says.

According to The Deal, Kaluzny was at PE firm, Golden Gate Capital, when the firm bought Express from L Brands (LB) in 2007 for $778 million (the company was then known as Limited Brands). Golden Gate ended up taking Express public in 2010, raising $270 million in an IPO.

Express confirmed in a statement last night that it received the letter from Sycamore and that it has established a special committee of board members to "determine a course of action it believes is in the best interest of all stockholders."

Express also said it adopted a shareholder rights plan, or poison pill, which would be triggered if any investor purchases more than 10% of the company's shares going forward.

--Written by Laurie Kulikowski in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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