UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant x Filed by a Party other than the Registrant ¨
Check the appropriate box:
¨ | Preliminary Proxy Statement |
¨ | Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
¨ | Definitive Proxy Statement |
x | Definitive Additional Materials |
¨ | Soliciting Material Under Rule 14a-12 |
J.CREW GROUP, INC.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
x | No fee required |
¨ | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11 |
(1) | Title of each class of securities to which transaction applies: |
(2) | Aggregate number of securities to which transaction applies: |
(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): |
(4) | Proposed maximum aggregate value of transaction: |
(5) | Total fee paid: |
¨ | Fee paid previously with preliminary materials. |
¨ | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. |
(1) | Amount Previously Paid: |
(2) | Form, Schedule or Registration Statement No.: |
(3) | Filing party: |
(4) | Date Filed: |
Forward-Looking Statements:
Certain statements herein are forward-looking statements. Such forward-looking statements reflect the Companys current expectations or beliefs concerning future events and actual results of operations may differ materially from historical results or current expectations. Any such forward-looking statements are subject to various risks and uncertainties, including the strength of the economy, changes in the overall level of consumer spending or preferences in apparel, our ability to compete with other retailers, the parties ability to consummate the proposed transaction on the contemplated timeline, the performance of the Companys products within the prevailing retail environment, our strategy and expansion plans, systems upgrades, reliance on key personnel, trade restrictions, political or financial instability in countries where the Companys goods are manufactured, postal rate increases, paper and printing costs, availability of suitable store locations at appropriate terms and other factors which are set forth in the Companys Form 10-K and in all filings with the Securities and Exchange Commission made by the Company subsequent to the filing of the Form 10-K. The Company does not undertake to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.
Additional Information and Where to Find It:
In connection with the proposed transaction, the Company has filed with the Securities and Exchange Commission and mailed to its security holders a definitive proxy statement. INVESTORS AND SECURITY HOLDERS OF THE COMPANY ARE URGED TO READ CAREFULLY AND IN THEIR ENTIRETY ALL RELEVANT MATERIALS FILED OR FURNISHED WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE DEFINITIVE PROXY STATEMENT, BECAUSE THESE MATERIALS CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. Investors and security holders may obtain a free copy of the definitive proxy statement and other documents filed or furnished to the Securities and Exchange Commission by the Company at the Securities and Exchange Commissions website at http://www.sec.gov or at the Companys website at http://www.jcrew.com and then clicking on the Investor Relations link and then the SEC Filings link. The definitive proxy statement and other relevant materials may also be obtained for free from J. Crew Group, Inc. by directing such request to J. Crew Group, Inc., 770 Broadway, New York, New York 10003; or (212) 209-2500. The contents of the websites referenced above are not deemed to be incorporated by reference into the definitive proxy statement.
Participants in Solicitation:
The Company and its directors, executive officers and other members of its management and employees may be deemed to be participants in the solicitation of proxies from its stockholders in connection with the proposed transaction. Information concerning the interests of the Companys participants in the solicitation is set forth in J. Crew Group, Inc.s proxy statements and Annual Reports on Form 10-K, previously filed with the Securities and Exchange Commission, and in the definitive proxy statement relating to the proposed transaction. Each of
these documents is available free of charge at the Securities and Exchange Commissions website at www.sec.gov and from the Company at http://www.jcrew.com, and then clicking on the Investor Relations link and then the SEC Filings link or by directing such request to J. Crew Group, Inc., 770 Broadway, New York, New York 10003; or (212) 209-2500.
INVESTOR PRESENTATION
February 23, 2011 |
2
Forward-Looking Statements:
Certain statements herein are forward-looking statements. Such forward-looking statements
reflect the Companys current expectations or beliefs concerning future events and actual
results of operations may differ materially from historical results or current expectations. Any such forward-looking
statements are subject to various risks and uncertainties, including the strength of the economy,
changes in the overall level of consumer spending or preferences in apparel, our ability to
compete with other retailers, the parties ability to consummate the proposed transaction on the contemplated
timeline, the performance of the Companys products within the prevailing retail environment, our
strategy and expansion plans, systems upgrades, reliance on key personnel, trade restrictions,
political or financial instability in countries where the Companys goods are manufactured, postal rate
increases, paper and printing costs, availability of suitable store locations at appropriate terms and
other factors which are set forth in the Companys Form 10-K and in all filings with
the Securities and Exchange Commission made by the Company subsequent to the filing of the Form 10-K. The
Company does not undertake to publicly update or revise its forward-looking statements, whether as
a result of new information, future events or otherwise.
Additional Information and Where to Find It:
In connection with the proposed transaction, the Company has filed with the Securities and Exchange
Commission and mailed to its security holders a definitive proxy statement. INVESTORS AND
SECURITY HOLDERS OF THE COMPANY ARE URGED TO READ CAREFULLY AND IN THEIR ENTIRETY ALL RELEVANT
MATERIALS FILED OR FURNISHED WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE
DEFINITIVE PROXY STATEMENT, BECAUSE THESE MATERIALS CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED
TRANSACTION. Investors and security holders may obtain a free copy of the definitive proxy
statement and other documents filed or furnished to the Securities and Exchange Commission by
the Company at the Securities and Exchange Commissions website at http://www.sec.gov or at the
Companys website at http://www.jcrew.com and then clicking on the Investor Relations
link and then the SEC Filings link. The definitive proxy statement and other
relevant materials may also be obtained for free from J.Crew Group, Inc. by directing such request to J.Crew Group, Inc., 770
Broadway, New York, New York 10003; or (212) 209-2500. The contents of the websites referenced
above are not deemed to be incorporated by reference into the definitive proxy statement.
Participants in Solicitation:
The Company and its directors, executive officers and other members of its management and employees
may be deemed to be participants in the solicitation of proxies from its stockholders in
connection with the proposed transaction. Information concerning the interests of the Companys
participants in the solicitation is set forth in J.Crew Group, Inc.s proxy statements and Annual
Reports on Form 10-K, previously filed with the Securities and Exchange Commission, and in
the definitive proxy statement relating to the proposed transaction. Each of these documents is available
free of charge at the Securities and Exchange Commissions website at www.sec.gov and from the
Company at http://www.jcrew.com, and then clicking on the Investor Relations link
and then the SEC Filings link or by directing such request to J.Crew Group, Inc., 770 Broadway, New York,
New York 10003; or (212) 209-2500.
|
3
COMPELLING TRANSACTION FOR SHAREHOLDERS
$43.50 per share in cash represents an attractive valuation
Provides certainty and speed
Transfers business execution and market risk to buyers
Approximately $43.67 per share if settlement is enforced and approved
Superior to all reasonably available alternatives, on a risk-adjusted basis
Stand-alone plan
Deteriorating operating performance impacts valuation
Overall execution risks associated with implementation of strategic plan
No other buyers
Extensive
go-shop
process
conducted
post-signing
Lengthy
85-day
go-shop
period
59 buyers contacted: 39 strategic, 20 financial
Full cooperation of management: Millard Drexlers willingness to consider
another buyer was expressly communicated
Extremely low break-up fee of $20MM (approximately $0.29 per share or 0.67% of
equity value)
Leveraged recapitalization
At prudent and acceptable levels of leverage for public retail companies, the value
that would be delivered to J.Crew shareholders from a leveraged
recapitalization is below $43.50 per share J.CREW SHAREHOLDERS SHOULD VOTE
BASED ON THE FACTS |
4
TRANSACTION
MULTIPLE
THE
FACTS
$43.50 per share in cash, $3 billion in total equity value
9.6x 2010E EBITDA per the November five year projections
8.6x LTM EBITDA (October 2010)
High EBITDA multiple relative to precedent transactions involving specialty,
branded apparel retailers
Gymboree transaction, a result of pre-signing auction, at 8.2x LTM EBITDA
Tommy Hilfiger transaction completed in May 2010 with strategic buyer at 7.9x LTM
EBITDA
Source:
Schedule 13E-3, Exhibit (c)(2) filed with SEC on 12/6/2010
|
5
PUBLIC COMPANIES COMPARISON
EV / FY2010E EBITDA (AS OF 11/19/2010)
Source:
Schedule 13E-3, Exhibit (c)(2) filed with SEC on 12/6/2010
Selected
Peers
Other Peers
Company
Offer: 9.6x
IMPLIED TRANSACTION MULTIPLE:
9.6x 2010E November five year projections
4.6x
5.5x
8.3x
10.6x
4.9x
5.5x
7.8x
8.2x
10.4x
16.8x
5.8x
6.0x
7.8x
7.2x
4.8x
6.9x
7.6x
6.1x
6.6x
Selected Peers Median: 6.9x
Other Peers Median: 6.6x
0.0x
5.0x
10.0x
15.0x
20.0x
Current Plan
IB ES
Aeropostale
Chico's
A&F
Urban
Outfitters
The Gap
Dress Barn
American
Eagle
Talbots
Children's
Place
Ann Taylor
Coldwater
Creek
Carter's
Coach
Limited
Brands
Guess?
Polo
Bebe |
6
RELEVANT TRANSACTIONS IN SPECIALTY APPAREL AND BRANDED RETAIL
Source:
Schedule 13E-3, Exhibit (c)(2) filed with SEC on 12/6/2010
Note:
(1) Defined as Transaction Enterprise Value. Figures shown in millions of US
dollars EV / LTM EBITDA
Specialty Apparel (Median = 7.9x)
Branded (Median = 8.9x)
Private Equity Buyer
Strategic Buyer
(1)
IMPLIED TRANSACTION MULTIPLE:
9.6x 2010E November five year projections
Offer: 9.6x
Acquiror
Apax
Apollo
Lee Equity
Advent
V. Heusen
Bain
Jones
Federated
Consortium
Consortium
Apollo
Bain
Consortium
Consortium
Istithmar
Date Announced
12/05
3/07
7/07
8/09
3/10
10/10
11/04
2/05
3/05
5/05
11/05
1/06
6/06
7/06
6/07
Transaction Value
$1,547
$2,581
$259
$312
$3,136
$1,761
$400
$17,260
$6,213
$4,981
$1,305
$1,958
$5,604
$1,819
$942
6.6x
9.4x
10.2x
12.2x
14.1x
8.9x
8.7x
8.8x
8.2x
7.2x
7.9x
7.9x
7.8x
7.9x
8.1x
Overall Median:
8.2x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
Tommy
Hilfiger
Claire's
Stores
Deb Shops
Charlotte
Russe
Tommy
Hilfiger
Gymboree
Barney's
May
Toys R Us
Neiman
Marcus
Linens n
Things
Burlington
Coat
Factory
Michaels
Stores
Petco
Barney's |
7
TRANSACTION PREMIUM
THE FACTS
THE EFFECTIVE TRANSACTION PREMIUM IS SUBSTANTIALLY HIGHER WHEN CONSIDERING THE
COMPANY ANNOUNCED DISAPPOINTING Q4 GUIDANCE ON THE SAME DAY AS THE TRANSACTION
ANNOUNCEMENT
Q4
FY
2010
GUIDANCE
(1)
Q4 CONSENSUS EPS EVOLUTION
Q4 guidance of $0.30-$0.35 per share (vs. $0.50 consensus)
Mid-point of guidance 35%
below
consensus
The Company confirmed guidance on January 20, 2011
Comparable
store
sales
in
the
negative
mid
single
digits
Direct sales growth in the positive low double digits
Gross
margin
decrease
of
approximately
600
to
700
basis
points
Inventory increase in mid-teens (approximately 10%
excluding a partial pull forward of Spring deliveries)
$0.50
$0.30
$0.40
$0.50
$0.60
$0.70
Jan
Mar
May
Jul
Sep
Nov
Guidance:
$0.30 -
$0.35
Q4 2009:
$0.61
Consensus
Source:
Company filings, FactSet
Note:
(1) Guidance presented excludes all expenses incurred (or expected to be incurred)
in connection with the Transaction THE FACTS
1.
The Company announced disappointing guidance at the time
of transaction announcement
2.
At the time of announcement, the Companys market
price did not account for the updated guidance and
therefore did not accurately reflect the Companys value
3.
The effective transaction premium is substantially higher
than the announced premium |
8
ILLUSTRATIVE PRE-TRANSACTION SHARE PRICE AND IMPLIED PREMIUM
Source:
Company filings, FactSet, I/B/E/S
Note:
(1) Reference Price as of 11/19/2010
(2) As disclosed in the Companys 1/20/2011 8K. Guidance presented excludes all
expenses incurred (or expected to be incurred) in connection with the transaction
(3) Represents average Company P/E multiple between Q2 earnings announcement and
guidance on 8/26/2010 and the 11/19/2010 reference date (1)
(3)
(2)
Reference
Price
$36.49
Divide by: IBES Consensus FY2010E EPS (11/19/2010)
$2.25
Reference Multiple
16.2x
Reference
Average Since 8/26
Multiple Applied
16.2x
16.2x
14.4x
14.4x
2010E EPS Based on Guidance
$2.08
$2.13
$2.08
$2.13
Implied Share Price
$33.73
$34.54
$29.89
$30.61
Implied Deal Premium Assuming $43.50 Offer
29.0%
25.9%
45.5%
42.1% |
9
RECENT
BUSINESS
TRENDS
BACKGROUND
AND
KEY
FACTS
Recent same store sales growth negative, and overall same store sales
growth deceleration
Margin compression in Q3 and Q4 relative to past performance
Wall Street consensus growth rates and forecasted EPS falling, and
below historical levels
Business plan execution risk includes reliance on accelerated growth
and overall margin improvement
Significant near-term investment cycle about to commence
|
10
DECELERATION OF SAME STORE SALES GROWTH
SAME STORE STORE SALES GROWTH
13%
6%
(4%)
(5%)
(5%)
8%
17%
15%
11%
(1%)
FY 06
FY 07
FY 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Guidance
Source:
Company filings
Financial
Crisis
Negative
Mid Single
Digits |
11
DECELERATION OF PROFITABILITY METRICS
YEAR OVER YEAR COMPARISON
Q3 2010A VS. Q3 2009A
4%
(1%)
(7%)
(13%)
(13%)
Revenue
Same Store
Sales
Growth
Gross
Profit
EBITDA
EPS
Source:
Company filings
Note:
(1) Based on mid-point of guidance as disclosed in the Companys 1/20/2011
8K Margin
down
493 bps
YoY
Margin
down
341 bps
YoY
YEAR OVER YEAR COMPARISON
Q4 2010E GUIDANCE VS. Q4 2009A
(46%)
Same Store
Sales
Growth
Gross Margin
EPS
Negative
Mid Single
Digits
Margin down
600 to
700 bps YoY
(1) |
12
PERFORMANCE PRE AND POST TRANSACTION ANNOUNCEMENT
Source:
FactSet
Note:
Peers represented by equal weighted index of Abercrombie & Fitch, Aeropostale,
American Eagle, Ann Taylor, Bebe, Carters, Chicos, Childrens Place, Coach, Coldwater Creek, The Dress Barn, The Gap, Guess?, Limited Brands,
New
York
&
Company,
Polo
Ralph
Lauren,
Talbots,
Under
Armour,
and
Urban
Outfitters.
Figures
indexed
to
J.Crew
share
price
of
$36.49,
the
closing
price
on
11/19/2010
(the Reference Date), the last available closing price prior
to finalizing
fairness
opinion
materials
(1) XRT represents the S&P Retail Index
$25.00
$30.00
$35.00
$40.00
$45.00
$50.00
Aug-10
Sep-10
Nov-10
Dec-10
Feb-11
XRT
5%
Peers
3%
J. Crew
19%
S&P 500
10%
(1)
Reference Date: 11/19/2010
Return since 11/19
SINCE TRANSACTION
ANNOUNCEMENT, THE RETAIL
SECTOR AND PEERS HAVE
UNDERPERFORMED THE MARKET,
AND J.CREW OPERATING RESULTS
HAVE UNDERPERFORMED PEERS |
13
We are concerned over an increasingly competitive
environment, tough comparisons, and our belief that it will be
difficult to return to sustained positive comps in the near-term...
we believe the company's financial performance will be
challenged
Janney
Montgomery, 9/29/2010
We are lowering our rating on J. Crew shares given our belief
that promotional activity is accelerating and a fashion
correction
may take multiple quarters to correct given current
competitive dynamics.
Piper Jaffray, 10/21/2010
We
expect
SSS
to
turn
negative
margins
will
likely
remain
under pressure for 2-3 quarters and we expect negative
earnings revisions to compress P/E multiple as in the past
we expect negative SSS to drive significant margin
contraction.
Morgan Stanley, 10/26/2010
We believe it may be difficult to justify a significantly higher
price, particularly given J. Crews weaker than expected
outlook. If this deal had not been announced, we believe JCG
shares would have been under pressure given its F4Q10
forecast being well below consensus expectations
Raymond James, 11/23/2010
ANALYSTS UNDERSTAND THE RISKS AND CHALLENGES TO THE STAND-ALONE STORY
Source:
Wall Street research
ANALYST PRICE TARGETS PRE-ANNOUNCEMENT
ANALYST COMMENTARY
Buy
Hold
Prior to announcement
of transaction and Q4
guidance
Sell
Date
8/27
8/27
11/15
8/27
8/27
8/26
7/15
8/26
8/27
10/25
10/5
11/9
10/21
11/11
8/26
10/21
11/18
$50
$49
$44
$35
$35
$31
$30
$34
$35
$40
$42
$40
$37
$35
$31
$33
$34
Oppenheimer
Baird
Atlantic Equities
B. Murray
Wedbush
Weeden
JP Morgan
UBS
Jefferies
MKM
BOA
Nomura
P. Jaffray
Goldman
BMO
Janney
Morgan Stanley
Median Price
Target: $35.00 |
14
AND HAVE BEEN POSITIVE ON THE TRANSACTION
We
believe
this
is
a
great
deal
for
J.Crew
shareholders,
since
the
estimated
takeover
value
represents a 28% premium to our previous $34 fair value estimate.
Morningstar Equity Research, 11/23/2010
While we would view the current potential offer as fair, we believe there is
the potential for other bidders to enter the fray.
Brean Murray Carret & Co., 11/23/2010
We commend management on effecting this deal and although we expect pressure
on the fundamentals, we expect shares to trade range bound around the deal
price.
Janney Capital Markets, 11/23/2010
We believe that the TPG Capital / Leonard Green proposal to acquire JCG at
$43.50 per share fairly values the shareholders of JCG, and we are using a
February 28, 2011 closing estimate.
MKM Partners, 11/23/2010
We
believe
it
is
unlikely
that
the
company
will
receive
a
higher
offer
during
this
time
since
(1)
$43.50
per share is already a premium to other recent deals such as GYMB (9x our FY10
EV/EBITDA estimate
for
JCG
versus
8x
consensus
estimate
for
GYMB),
(2)
its
comp
trends
have
weakened
further,
and
(3)
it
did
not
receive
any
other
bids
during
the
initial
go-shop
period.
Raymond James, 1/20/2011 |
15
OTHER NOTABLE COMMENTARY ON THE TRANSACTION
At
$43.50
a
share,
the
J.Crew
buyout
carried
a
16
percent
premium
to
its
stock
price
the
day
before
the
deal
Some
have balked that the offer is still well below J.Crews 52-week high of
$50.96 in April. But the price looks pretty good, considering
that
the
retailer
whose
earnings
have
taken
a
hit
of
late
was
trading
in
the
$30s
before
DealBook
broke news of the talks on Nov. 22.
NY Times (DealBook), 11/30/2010
The price represents a premium of 16% to J.Crews Tuesday closing price
before the announcement and 29% premium to last months average price.
This is nearly 3% higher than our price estimate for J.Crews stock of $42.35.
Forbes, 12/2/2010
The deal may ultimately be right for shareholders. After all, the buyers are
paying a 23 percent premium, and the company's
earnings
have
been
lousy
of
late.
NY
Times,
1/4/2011
Orrico, whose fund owns J.Crew stock, said the board has taken steps to
protect investors. These include negotiating the right to seek other offers
and a lower-than-average break-up fee that would make ending the deal less expensive.
He views the $43.50-a-share bid by the TPG group as fairly
priced.
Bloomberg, 1/13/2011
I
dont
expect
competing
bids,
given
that
the
offer
is
full
and
the
valuation
is
more
than
fair,
said
Randal
Konik,
managing director of New York-based Jefferies & Co. He recommends holding
the stock. Its interesting that there are all these lawsuits,
but to me the stock would be in the 20s right now if there was no deal.
Bloomberg, 1/18/2011
If the deal with TPG falls apart and no third party bidder
emerges, the stock might trade down significantly
-
ISS report, February 21, 2011, pages 4, 27, and 32 |
16
DECLINING VALUATION MULTIPLES AND CONVERGENCE WITH PEERS: EV / EBITDA
EV / NTM EBITDA
J.Crew
7.0x
Peers
6.5x
0.0x
3.0x
6.0x
9.0x
12.0x
15.0x
18.0x
Jun-06
May-07
Mar-08
Feb-09
Jan-10
Nov-10
Source:
Schedule 13E-3, Exhibit (c)(2) filed with SEC on 12/6/2010
Note:
Peers represented by median of group, and include Abercrombie & Fitch, Aeropostale, American Eagle,
Ann Taylor, Bebe, Carters, Chicos, Childrens Place, Coach, Coldwater Creek, The Dress Barn, The Gap, Guess?, Limited
Brands, New York & Company, Polo Ralph Lauren, Talbots, Under Armour, and Urban Outfitters
|
17
DECLINING VALUATION MULTIPLES AND CONVERGENCE WITH PEERS: PRICE / EARNINGS
PRICE / NTM EPS
J. Crew
15.2x
S&P500
13.3x
Peers
15.3x
0.0x
10.0x
20.0x
30.0x
40.0x
50.0x
Jun-06
May-07
Mar-08
Feb-09
Jan-10
Nov-10
Averages
2006
2007
2008
2009
YTD
2010
J.Crew
31.0x
28.8x
17.6x
26.3x
16.5x
Peers
17.3x
16.8x
13.1x
14.6x
15.7x
Source:
FactSet as of 11/19/2010, IBES. Earnings estimates based on IBES consensus median
Peers represented by median of group, and include Abercrombie & Fitch, Aeropostale, American Eagle, Ann Taylor, Bebe, Carters, Chicos, Childrens Place, Coach, Coldwater Creek, The Dress Barn, The Gap, Guess?,
Limited
Brands, New York & Company, Polo Ralph Lauren, Talbots, Under Armour, and Urban Outfitters
Note: |
18
LEVERAGED
RECAPITALIZATION
LESS
COMPELLING
FOR
PUBLIC
SHAREHOLDERS
"LEVERED" PEERS
"UNLEVERED" PEERS
Median FY2011E EV / EBITDA
5.6x
7.2x
Median 3 Year Stock Price Performance
(21.7%)
34.5%
Median 1 Year Stock Price Performance
(23.6%)
17.2%
Adjusted Debt / EBITDAR
Greater than 3.5x
Less than 3.5x
Source:
FactSet , company filings
TRADING HISTORY OF LEVERED RETAILERS DEMONSTRATES SIGNIFICANT
UNDER-PERFORMANCE RELATIVE TO UNLEVERED RETAILERS |
19
ISS REPORT: CORRECTING THE RECORD
ISS Valuation Methodology
ISS Assertion
Correcting the Record
Discounted Cash Flow
Suggests that financial advisors
fairness opinion applied NTM
EBITDA multiple for terminal
value rather than LTM multiple in
arriving at the DCF valuation
range of $39.71 - $ 51.55 per
share (pages 4 and 26)
Fairness opinion materials clearly show that calculation of terminal value is based on LTM,
not NTM multiples (page 18 of November 22 financial advisor presentation)
-
This fact was explained in a conversation with ISS analysts on February 17, 2011
Therefore, no adjustment is necessary and the $39.71 - $51.55 DCF range is correct
Discounted Cash Flow
ISS calculates terminal value in
2014 by applying LTM multiples
to NTM EBITDA, yielding a
value shortfall per share of
$3.57 and an ISS DCF value
range of $43.28 - $55.12 per
share (page 26)
Applying LTM multiples to NTM EBITDA does not follow generally accepted principles of
corporate finance and overstates terminal value
In addition, ISS fails to adjust for the 2015 cash flows when it calculates terminal value in
2014, thereby double-counting the 2015 cash flow in its DCF value
-
Adjusting for 2015 cash flow, methodology used by ISS yields a difference of
approximately $1.00 per share, implying a value range of approximately $40.73 - $52.49
per share vs. fairness opinion range of $39.71 - $51.55 per share
-
In addition, the ISS methodology is based on an unusual DCF period of 4 years vs.
industry standard (and period used in fairness opinion) of 5 years
Premiums Paid
Premiums paid analysis
suggests a 1-day mean premium
of 36% and 4-week mean
premium of 42% (higher than the
J.Crew transaction premiums of
16% and 33%, respectively)
(pages 6 and 33)
ISS premiums analysis reflects 1-day and 4-week prices prior to unaffected date
The Charlotte Russe premium is based on an unaffected share price approximately 7
months prior to announcement, generating 1-day and 4-week premiums of 216% and 201%
-
Charlotte Russe is a clear outlier given the long time period prior to announcement and
skews the resulting premium data
Excluding the Charlotte Russe transaction, the revised mean for the 1-day and 4-week
premiums would be 14% and 22% and the median would be 4% and 20%, respectively
As calculated by ISS, J.Crews 1-day and 4-week premiums of 16% and 33% compare
favorably to the revised ISS mean and median data
Stand-alone Value
ISS concludes that the market
had already priced in skepticism
about earnings long before the
Q3 earnings announcement
(page 27)
Markets consensus estimates for Q4 were more than 50% greater than the announced
guidance
There was no indication from market pricing or analyst reports incorporating the full
magnitude of the Q4 guidance
|
20
RECOMMENDATION OF THE SPECIAL COMMITTEE
Significant
premium
above
stock's
trading
levels
over
the
months
leading
up
to
announcement
and
attractive
multiples
More
favorable
to
the
Company's
stockholders
than
the
status
quo
or
other
strategic
alternatives
available
Special Committee's understanding of the business, operations and management of the
Company, including the Company's prospects as a stand-alone
business
The Company's recent financial performance and management's reduced expectations
for the Company's short and long term future performance
Timing and execution risk associated with achieving $43.50 per share under
alternatives to the sale to TPG/LGP
Limited execution risk
Committed financing with no financing condition
Standard regulatory approvals process
High reverse termination fee and right to specific performance
54 day go-shop
(subsequently extended to 85 days), low break-up fees and full cooperation of
management The Special Committee unanimously determined that the TPG/LGP offer
was advisable and fair to and in the best interests of the Company and its
unaffiliated stockholders |