Thursday, June 25, 2009

Tween Brands Merges with Dress Barn

Tween Brands is up 30% today on news of the all stock deal with Dress Barn (DBRN). Its interesting that DBRN is up 10%+ on the news. Its very uncommon for an acquirer to increase on news of a purchase. Our take is that the market sees this as a steal by DBRN considering they were able to buy a premium brand for about 85% lower then its peak valuation. My only concern is that TWB has some stuff hiding in the closet for their BOD to agree to such a minimal price of $137M when they still have sales in the $1B range. Being that its an all stock deal they do still get the opportunity to participate in any further market rallies and to any rebound in the Justice line, though on a very diluted basis. In general your getting mostly an investment in DBRN going forward.

Highlights of the deal:

  • Stock-for-stock merger expected to be neutral to earnings in the first full year of combined operations and accretive thereafter
  • Dress Barn, Inc. to add 908 Justice stores, the leading specialty apparel retailer to tween girls
  • Combined company to operate 2,465 locations, generating $2.4 billion of pro forma net sales
  • Pro forma consolidated balance sheet, after repayment of Tween Brand, Inc.’s bank debt, expected to have over $200 million in cash and investments

Our take is to step to the sidelines and cash in the investments made for our clients and personal accounts. TWB appears to have a much more valuable brand, but if management is willing to sell at these levels then they must have a reason such as a horrible Q2. DBRN is an interesting value with TWB folded in, but we'll follow from the sidelines until we better understand the reasoning for the deal.

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