With the last four premium posts focused on merger arbitrage opportunities, I figured I would shift my attention to some of the other event-driven strategies that Inside Arbitrage offers and discuss an insider purchase that caught my attention this week. A few days ago, a beaten down retailer showed up on a screen I was running and I was shocked by how much it had dropped over the last year and how cheap it looked using most valuation metrics. To top it off, it was also paying a dividend of over 9%. The yield is now 8.75% after the stock appreciated this week.
I started wondering if this was yet another value trap or a company that had gotten thrown out with the retail bathwater. Was this another struggling debt-laden retailer with declining revenue and declining same store sales that hadn’t quite figured out the mixed retail environment that we find ourselves in where both the online channel and a physical presence are important? Or was it a company that had kicked its erstwhile charismatic founder to the curb and had leveraged itself to buy another retailer?
All of this is partially true for the company called Tailored Brands (TLRD), formerly known as Men’s Wearhouse before its ill-fated $1.8 billion acquisition of Jos. A. Bank. The stock is down more than 82% since that merger closed on June 18, 2014. The decline accelerated over the last year with the stock down 72% even as the S&P 500 went up 8% and the retail ETF XRT eked out a gain just shy of 2%.
George Zimmerman who founded and ran Men’s Warehouse for 40 years before he was kicked out, warned Men’s Wearhouse against buying Jos. A. Bank and they should have heeded his warning. A lot of mergers go awry, leaving the acquiring company with indigestion and in many cases in bankruptcy. While reading the book Merger Masters by Kate Welling and Mario Gabelli, I was struck by just how many risk arbitrageurs also played the other end of the cycle by investing in bankruptcies. The irony of this story is that it was Jos. A. Bank that made a $2.3 billion bid for Men’s Wearhouse in October 2013. Men’s Wearhouse turned down that bid, made a counter bid for Jos. A. Bank and eventually prevailed. Tailored Brands’ current market cap is $413 million and its enterprise value is $1.52 billion after including $1.1 billion in net debt on the balance sheet.