J. Crew makes deal to be taken private for $3B

Preppy fashion retailer J. Crew Group Inc. on Tuesday agreed to be taken private in a $3 billion deal that would be the second multibillion dollar specialty retail buyout launched in two months.

The announcement of an offer from two investment firms — including one that used to own J. Crew — came as the retailer reported Tuesday that its third-quarter net income fell 14 percent, hurt by weaker women's clothing sales. The company also lowered its guidance for the year.

Under the deal as proposed, J. Crew shareholders would receive $43.50 per share from private equity firms TPG Capital and Leonard Green & Partners. That is a 16 percent premium to the stock's closing price Monday of $37.65.

CEO Mickey Drexler, the former Gap Inc. chief credited with turning J. Crew around since coming aboard in 2003, will remain in that role and retain a "significant" stake in J. Crew. He owned 5.4 of its outstanding shares as of September.

In a prerecorded call, Drexler called the proposal a "highly compelling offer that will provide J. Crew's shareholders with substantial and immediate value for their shares."

J. Crew shares rose $6.18, or 16.4 percent, to $43.83 during midday trading. The stock has traded between $30.06 and $50.96 during the past 52 weeks.

TPG took a majority stake in J. Crew Group Inc. in 1997 and remained majority shareholder until the company went public in 2006.

As part of the proposed deal, J. Crew can solicit other offers until January 15, although there is no guarantee the company will get a higher bid, J. Crew said.

Private equity buyouts are rising after a lull during the recession. Gymboree Corp. in October agreed to be bought by Bain Capital for $1.8 billion. That deal closed Tuesday.

Marc Cooper, managing director and head of retail at Peter J. Solomon Co., said specialty retailers can be a solid investment for private equity firms because the recession forced retailers to become much more efficient, cut costs and lower inventory. When chains slowed or stopped expanding, that also increased their cash on hand, he said.

"They are fairly stable, have significant cash flow and are trading at a low multiple (of earnings per share)," he said. "That's a recipe for a perfect leveraged buyout."

Gymboree and J. Crew both have "safe, stable, strong management teams," which is reassuring to private equity firms, he said. "Mickey Drexler is a good guy to back."

Wall Street Strategies analyst Brian S. Sozzi said J. Crew is one of the more expensive specialty retail stocks. But he agreed that buyers would get a "strong management team led by Mickey Drexler . a productive mall-based store portfolio and a growing outlet business."

J. Crew, based in New York, said its third-quarter net income fell 14 percent to $37.8 million, or 58 cents per share. That was better than the 54 cents per share analysts expected.

Revenue rose 4 percent to $429.3 million, just shy of the $430.3 million analysts expected.

Revenue at stores open at least a year — considered a key indicator because it excludes stores that opened or closed during the year — fell 1 percent.

Demand for accessories, men's and children's clothing and other items was strong, but demand for women's clothing fell. In response, the company marked down clothing more aggressively than it had expected and introduced fall clothing more quickly than planned to offset the weakness, CFO Jim Scully said.

J. Crew significantly slashed its forecast for full-year earnings to a range of $2.08 to $2.13 per share from $2.25 to $2.35 per share. This was the second quarter in a row that J. Crew cut its outlook.

Analysts expected full-year earnings of $2.24 per share.

J. Crew's management had high turnover until Drexler arrived. He is credited with revitalizing the chain by returning it to its preppy roots and offering more upscale merchandise.

After a tough 2008 when it suffered a loss and cut jobs and costs, J. Crew has shown relative strength. It has enjoyed special prominence since President Barack Obama's inauguration in January 2009, when the rest of his family wore the company's clothes.

For its most recent fiscal year, which ended in January, net income more than doubled as revenue rose 11 percent to $1.58 billion.

TPG has investments in retail companies including the Dallas-based high-end department store chain Neiman Marcus. Leonard Green invests in retailers such as The Container Store and David's Bridal Inc. The firms jointly own Petco Animal Supplies.

J. Crew shares rose 47 percent between when it went public in 2006 and Monday's close, but they are down 16 percent since the beginning of 2010.