$3 Billion buyout for J. Crew

J. Crew's Mickey Drexler
photo from Bloomberg News 

The Wall Street Journal By GINA CHON And ANUPREETA DAS

Clothing retailer J. Crew Group Inc. agreed to be bought by two private-equity firms for $43.50 a share in cash, or about $3 billion.

TPG Capital, a former owner of J. Crew, and Los Angeles-based Leonard Green & Partners plan to work with J. Crew Chief Executive Millard Drexler, who will remain in that role and maintain a "significant equity investment" in the New York-based company.

The purchase price is a 16% premium to the stock's closing price of $37.65 Monday. Shares were up $6.36, or 17%, to $44.01 Tuesday morning on the New York Stock Exchange.

Separately, J. Crew said its third-quarter profit fell to $37.8 million, or 58 cents a share, from $43.9 million, or 67 cents a share, a year earlier. Sales rose 4% to $429.3 million with comparable store sales decreasing 1%. The company cut its full-year profit forecast to $2.08 to $2.13 a share from a previous guidance of profit of as much as $2.35 a share.

The negotiations between the parties faced some challenges in recent weeks, largely over valuation and the company's desire to allow rival bidders to make competing offers, people familiar with the matter said. The deal includes a "go shop" period that allows J. Crew to solicit other offers through Jan. 15 beyond the holiday season.

Mr. Drexler, who previously ran Gap Inc. before being forced out in 2002, has thrived at J. Crew, positioning the New York-based chain as a seller of high-end casual gear and expanding into new areas such as bridal wear. Its preppy clothing is favored by First Lady Michelle Obama. Mr. Drexler is heavily involved in the day-to-day operations, and his intense focus on product and avowed disdain for markdowns have helped J. Crew emerge from the recession stronger than many of its casual-apparel counterparts.

J. Crew's Mickey Drexler will remain chief executive after the proposed buyout. He also will maintain a 'significant' investment in the retailer.

The brand also benefited from the trade-down phenomenon, where luxury consumers sought lower-price alternatives.

Recently, the retailer has begun to show signs of sales weakness amid a lack of fashion hits, discounting by competitors and Mr. Drexler's efforts to elevate the price of some of the company's goods to luxury status.

This week, the company is offering 25% off all orders of $150 or more, an across-the-board discounting technique that J. Crew has largely avoided.

Given the involvement of current management and J. Crew's prior owners, the deal is likely to face tough scrutiny from shareholders, who want to be sure they receive the highest price for their shares.

TPG was a previous owner of J. Crew, buying an 88% stake for about $500 million in 1997. The company later went public in 2006.

Private-equity firms are flush with cash and under pressure to spend it. That has made them some of the most aggressive bidders in recent deals, often for companies they previously owned. TPG, for instance, has been searching high and low for partners to join its bid to take Seagate Technology PLC private.