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Assessing Eminence Capital's 4Q13 positions in Humana and more

Part 2
Assessing Eminence Capital's 4Q13 positions in Humana and more (Part 2 of 7)

The Men’s Wearhouse and Jos. A. Bank merger helps Eminence Capital

Eminence Capital and The Men’s Wearhouse

Eminence Capital initiated new positions in The Men’s Wearhouse Inc. (MW), KAR Auction Services Inc. (KAR), Humana Inc. (HUM), and Valmont Industries (VMI). The fund exited its positions in Pandora Media Inc. (P) and Tyco International (TYC).

Eminence Capital’s top new buys, as revealed in its 4Q 13F filing, include The Men’s Wearhouse Inc. (MW). The fund owns 9.8% of the common stock of the men’s suit retailer and is its single largest shareholder.

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The Men’s Wearhouse last week agreed to acquire rival Jos. A. Bank Clothiers Inc (JOSB) for $65.00 per share in cash, or about $1.8 billion. Together, The Men’s Wearhouse and Jos. A. Bank will have more than 1,700 stores in the U.S., with approximately 23,000 employees and sales of $3.5 billion on a pro forma basis. Jos. A. Bank Clothiers, established in 1905, is a leading designer, manufacturer, and retailer of men’s classically styled tailored and casual clothing, sportswear, footwear, and accessories.

Ricky Sandler’s Eminence Capital was responsible for the culmination of the deal after it went activist on The Men’s Wearhouse last year by pushing MW’s board to engage in merger discussions with Jos. A. Bank Clothiers. Eminence also holds a 4.9% stake in Jos. A. Bank. Eminence released a presentation in November of last year outlining the merits of this merger after Jos. A. Bank withdrew a $2.3 billion takeover bid for The Men’s Wearhouse. The MW board had rejected the $48.00-per-share proposal on the grounds that it significantly undervalued the company. MW then proposed to acquire all of the outstanding shares of Jos. A. Bank Clothiers for $55.00 per share in cash or an enterprise value of approximately $1.2 billion that was turned down by Jos. A. Bank. MW commenced a cash tender offer in January to acquire all outstanding shares of Jos. A. Bank for $57.50 per share.

In order to fend off the takeover attempt, Jos. A. Bank announced a deal to buy the Eddie Bauer clothing brand for $825 million in January. Jos also announced a $300 million share buyback. Eminence slammed the move in a letter to Jos’ board, saying the deal “is a poor strategic decision for Jos. A. Bank at a price that is in our view excessive and almost surely destroys shareholder value.”

Eminence further stated that “40% of Eddie Bauer’s sales are to women and virtually all of its products are outside of Jos. A. Bank’s core men’s tailored-clothing segment.” Eminence continued to urge Jos. A. Bank to consider a merger with MW and supported a new superior $65-per-share offer by The Men’s Wearhouse in March. After the deal was finalized last week, Jos. A. Bank terminated its agreement to acquire Everest Holdings LLC, the parent company of Eddie Bauer. Jos. A. Bank also withdrew its previously announced tender offer to purchase for cash up to $300 million in value of its common stock. Eminence said it supports the merger of the two suit retailers. The deal seems to have benefited Jos. A. Bank, as the increased offer price is 56% more than the company’s stock price in October before the merger battle began.

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MW’s 3Q results last year beat Street estimates, as total net sales for the fiscal 2013 third quarter increased 2.8% or $17.9 million to $648.9 million from $631.0 million for the same period the year before. GAAP diluted earnings per share were $0.79, and adjusted diluted earnings per share were $0.90, compared to the prior year’s diluted earnings per share of $0.95. Third quarter results were in line with internal expectations and were below 2012 third quarter results, primarily due to a lower tuxedo margin. Third quarter comparable-store sales at The Men’s Wearhouse brand increased 2.6%.

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