Mar 3, 2014
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J.Crew could be a good fit for Uniqlo, but not at $5 billion

Mar 3, 2014

TOKYO, Japan - An acquisition of preppy J.Crew by Fast Retailing could fit snugly between its Uniqlo basics and more upmarket Theory brands, but the Japanese clothing firm is likely to balk at the $5 billion price tag J.Crew is said to be asking for.

J Crew SS14 | Source: J Crew

One banker in Tokyo, who is not involved with Fast Retailing's talks with J.Crew but is familiar with Chief Executive Tadashi Yanai's thinking, said the billionaire had looked at the deal "but would not pay $5 billion for J.Crew."

He added that Yanai was also looking at other brands, with most potential deals still at early stages.

At $5 billion, valuations for J.Crew are too heady, Tokyo-based analysts add. And while Yanai has set a goal of turning the company into the world's top apparel retailer by 2020, he has famously abandoned a high-profile deal for Barneys New York over price before.

People familiar with the matter said on Friday that Fast Retailing is exploring a deal for J.Crew Group Inc which was taken private by TPG Capital LP and Leonard Green & Partners LP for $2.8 billion in 2011.

One person said the U.S. apparel chain believed it should fetch at least $5 billion. It is not, however, the only option for J.Crew which may also pursue an IPO or look at other takeover approaches, the sources said.

Fast Retailing has said it does not comment on speculation while J. Crew representatives have not responded to requests for comment.

A $5 billion price tag implies a valuation of 17 times J.Crew's enterprise value, including debt, over its earnings before interest, tax, before interest, tax, depreciation and amortization (EBITDA), said Deutsche Securities analyst Takahiro Kazahaya. He added that is more than double a typical valuation of seven to eight times for M&A deals in the retail industry.

In the year ended February 1, J.Crew's revenues increased 9 percent to more than $2.4 billion, while EBITDA rose from $360 million to as much as $371 million.

"I would be unhappy if they bought the brand for $5 billion," Kazahaya said, adding that Uniqlo could invest in itself for quicker returns and noting the danger of a bidding war.

Sources have also said that South Korean fashion conglomerate E.Land Group is separately exploring a deal for J.Crew which E.Land has denied. Buyout fund Advent International Corp is also interested in J.Crew, Bloomberg news has reported.


Shares in Fast Retailing closed up 1.2 percent on Monday against a 1.3 percent decline in the main Nikkei average .N225., with analysts speculating that investors welcomed the possibility of a J.Crew purchase but didn't necessarily believe the final price would approach those heights.

But setting the issue of price aside, analysts say J.Crew would make more sense than other brands Yanai has reportedly looked at.

"There have been rumors in the past about interest in brands like Abercrombie & Fitch, or Esprit, or Giordano. I couldn't quite see the fit. But with J.Crew, it's not a bad one," Kazahaya said.

J.Crew's network could also serve to speed up Uniqlo's store openings in the United States if some stores could be given over to Uniqlo products. Uniqlo is aiming for 100 stores in several years from the 17 it has now.

"It takes a lot of time to look for store locations, and start from scratch," said Barclays Securities analyst Ryota Himeno. "Utilising an established brand's stores to expand (Uniqlo's) network could be effective in speeding up the process," he said.

As of February, J.Crew, run by former Gap CEO Mickey Drexler, operated 330 retail stores, including 257 J. Crew retail stores, eight Crewcuts stores and 65 Madewell stores, according to its website.

While Fast Retailing is Asia's biggest clothing retailer, it is little known in the world's biggest market except for New York. Yanai has, however, spared little expense on its three-storey flagship store on Fifth Avenue - the company is shelling out more than $300 million for 15 years of rent for the prime real estate.

J.Crew's experience with local sizing could also help as Uniqlo looks for a better fit for American customers, particularly for women's clothing - traditionally a weaker spot for Uniqlo.

Group Executive Vice President Yoshihiro Kunii told Reuters in an interview last week that the addition of California-based denim specialist J Brand in 2012 was helping Uniqlo design and produce better denim products.

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