J. Crew Sale a Boon to Investors, Sponsors

Uniqlo parent in talks to acquire iconic US brand
March 3, 2014 Updated: March 2, 2014

Multichannel fashion retailer J. Crew Group Inc. could be snapped up by Japan’s Fast Retailing Co. Ltd., the parent company of apparel chain Uniqlo.

The possible merger, which is not public information and was first reported by The Wall Street Journal (WSJ) Saturday, will provide a lucrative exit for its private equity sponsors and a potential boon for stock investors.

Lucrative Exit
J. Crew was taken private in 2011 by TPG Capital Partners, Leonard Green & Partners LP, and its CEO Millard S. Drexler for $2.8 billion.

According to the WSJ report, a potential sale of the company would fetch $5 billion, almost double what the private equity firms paid merely two years ago. The 79 percent gain is even more impressive considering private equity investors usually hold companies for five years.

TPG and Leonard Green are still exploring their exit options for J. Crew and a sale to Fast Retailing isn’t imminent. According to a Bloomberg report, private equity firm Advent International Corp. is another candidate to acquire J. Crew. Other options include an initial public offering (IPO), which would be a more gradual exit strategy.

Private equity firms have been busy selling their portfolio investments because the IPO market improved considerably during last year’s market rally. Relatively low interest rates also incentivized companies to go for mergers on a larger scale.

In December 2013, Blackstone Group LP took advantage of record high stock market valuations and floated hotel chain Hilton shares on the stock market, raising $2.35 billion. Two months earlier, Warburg Pincus-backed Antero Resources went public, raising $1.57 billion.

“PE-backed IPOs raised $57 billion in 2013, more than twice the amount raised during the same period in 2012,” according to the report “Private Equity, Public Exits Q4” from Ernst & Young. “This marks the second-highest total on record, behind 2007.” The report also pointed out that private-equity-backed IPOs accounted for 19 percent of firms, which went public in 2013 globally.

Purchasing Growth
Fast Retailing isn’t coy about its ambitions of becoming the biggest fashion retailer in the world. And a purchase of J. Crew would go a long way to establish the company in a saturated U.S. market.

Tadashi Yanai, Fast Retailing’s chief executive and one of Japan’s wealthiest individuals, has long craved a bigger footprint in the United States. Uniqlo currently owns almost 1,300 stores in Asia, but has only 20 in the U.S. market.

If Fast Retailing succeeds in its purchase, it’s unclear whether current J. Crew CEO Drexler would remain. According to the WSJ, Yanai studied the business of Gap Inc.—which rose to prominence in the 1990s under the leadership of Drexler—and used it as a model for Uniqlo’s operations.

IPO Climate
If J. Crew’s sponsors instead choose to let it go public, its shares could offer a decent return for people who get in on the IPO.

At first glance, the $5 billion valuation for J. Crew would seem expensive relative to industry peers. According to the company, adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was around $370 million for the fiscal year ended Feb. 1. That gives it a valuation of 13.5 times EBITDA. 

Looking at its largest publicly traded peers, the typical EBITDA multiple is between 7.2 times (American Eagle Outfitters) and 12.8 times (Urban Outfitters).

But a high valuation like this hasn’t stopped recent IPOs from outperforming the market. According to Bloomberg data, the 39 IPOs in 2014 show an average gain of 32.6 percent, led by a few notable outperformers in biotechnology. Going back a few months to October 2013, Bain Capital’s Burlington Stores Inc. was the last major private-equity-backed retail chain to go public. Its shares have since risen 60 percent.

In addition, the recent few weeks have been positive for the retail sector on consumer confidence and growing employment in the United States, despite a brutal winter, which has dampened commercial activity. The S&P Retail Select Industry Index rose 7.3 percent in February 2014.

According to its corporate website, J. Crew has 330 stores, with 257 namesake stores, 65 Madewell stores, and 8 Crewcuts stores. In addition to Uniqlo, Fast Retailing owns a diverse brand portfolio including Helmut Lang, Theory, and Princesse Tam.Tam.