2 Equity Firms to Buy J. Crew for 3 Billion

J. Crew

Holiday look from J. Crew

New York–Shares of J. Crew jumped 16% this morning upon news that the specialty retailer agreed to be bought by two private-equity firms for $43.50 a share in cash, or about $3 billion.

TPG Capital and Los Angeles-based Leonard Green & Partners plan to work with Millard “Mickey” Drexler, J. Crew’s chairman and ceo, who will remain in that role and maintain a “significant equity investment” in the New York-based company. TPG was a previous owner of J. Crew, buying an 88% stake for about $500 million in 1997. The company later went public in 2006.

The purchase price is a 16% premium to the stock’s closing price of $37.65 Monday.

Commenting on the purchase, Drexler said in a statement: “We are in this for the long term, and we do what we do day in and day out so we can deliver the best possible products to our customers,” adding that working with the private equity firms “will enable us to invest in our future growth.”

  J. Crew will conduct a go-shop period through January 15, 2011, to give prospective rival bidders the chance to evaluate the company’s holiday sales performance.

Q3 Results ‘Disappointing’

Separately, J. Crew said its third-quarter profit fell to $37.8 million or 58 cents a share, from $43.9 million, or 67 cents a share, a year earlier. Sales rose 4% to $429.3 million with comparable store sales decreasing 1%. Analysts’ average estimate was for revenue of $430 million. The company also cut its full-year profit forecast to $2.08 to $2.13 a share from a previous guidance of profit of as much as $2.35 a share.

In the third quarter, its inventories grew 17% from a year earlier to $261 million and gross margin slipped 43.5% from 48.4%.

“Needless to say, we are disappointed with our results and our fourth-quarteroutlook,” Drexler told analysts on a conference call today.

Going Private?

Some analysts believe the company might eventually go private. Drexler may be looking to go private as J. Crew adapts to changing consumers’ tastes and deals with inventory that isn’t selling well, said Nathan Brown, an analyst at J. Crew shareholder Waddell & Reed Financial Inc.

“You’ve got too much of the wrong stuff and the stuff is still coming in,” said Brown, whose firm owned more than 760,000 shares as of Sept. 30. “Over the next couple of quarters, the results at J. Crew have the ability to be somewhat sloppy.”

“This removes them from the public eye and gives them a chance to readjust,” said Brian Sozzi, equity research analyst at Wall Street Strategies. “It will allow them to expand more aggressively, take a more pragmatic approach to opening more stores in the United States., and might give them the balance sheet to expand internationally.”

Wedbush Securities analyst Betty Chen said J. Crew’s third-quarter results and lowered guidance show some of its merchandise issues will continue to plague the company through the fourth quarter.

“I think if J. Crew were to remain a standalone company, having to work through some of the fashion and merchandise issues on hand at the moment, the stock wouldn’t be able to recover to the offer price until spring or summer of next year at the earliest,” Chen said.

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