What Ann’s Confidentiality Pact With Golden Gate Capital Means
Following persistent pressure from activist investor, Engine Capital, to consider a sale of the company, Ann Inc (NYSE:ANN) recently signed a confidentiality agreement with its biggest shareholder, Golden Gate Capital. [1] The San Francisco based private equity firm, which has a history of acquiring companies, disclosed a 9.5% stake in Ann earlier this year, stating that it invested in the company from a long term perspective, and wasn’t pushing Ann’s management for a sale. The women’s specialty retailer said in a filing earlier this month, that the agreement includes discussions on several points regarding Ann’s probable future options, that can generate the best returns for shareholders. [2] Golden Gate Capital, Engine Capital and Red Alder LLC, all share the opinion that the market isn’t valuing Ann appropriately. Engine Capital and Red Alder LLC believe that the retailer could easily fetch around $2.5 billion in public-private transition, while its current market cap stands at $1.80 billion. As soon as Ann disclosed its agreement with Golden Gate Capital, its shares went up by almost 10%.
While Engine Capital and Red Alder LLC were fixated on convincing Ann’s management to put the company up for sale, Golden Gate Capital had not shown any such interest. In response to the consistent pressure from the activist investor and its affiliates, Ann hired JPMorgan (NYSE:JPM) a couple of months back to look for possible sale options. [3] With the recent agreement, Golden Gate Capital has been included in the ongoing options review process, and Ann believes that the private equity firm’s expertise in retail would prove helpful. In its filings, the company said that its interactions with Golden Gate Capital have been positive so far and it would be beneficial to continue discussions on a more detailed basis.
Our price estimate for ANN stands at $38, which is less than 5% below the current market price.
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See our complete analysis for ANN
While the specific points of Golden Gate Capital’s agreement with Ann have not been disclosed, it is likely that the private equity firm will look to increase its stake in the company and propose certain changes in the management structure. Apart from Ann, Golden Gate Capital has invested in several restaurant and retail companies such as California Pizza Kitchen Inc., Eddie Bauer Holdings Inc. and Zale Corp. The private equity firm has bought some software companies, a restaurant chain and a company that supplies curtains and drapes to retailers, over the last couple of years. [4] With its recent agreement with Ann, there is a possibility that Golden Gate Capital might look to acquire the women’s specialty retailer at a later stage. However, the standstill period clause of the agreement would prevent a hostile takeover. Nevertheless, there is a possibility of a complete buyout, which should please Engine Capital and Red Alder LLC.
In an investor presentation earlier this month, while restating their stand on what Ann should do, Engine Capital and Red Alder said that the company could fetch up to $65 per share if another retail chain such as Chico’s FAS Inc, Ascena Retail Group, J.Crew or Fast Retailing Co planned to acquire it. [5] They can expect a buyout offer on similar lines from Golden Gate Capital, if and when it decides to take Ann private. Assuming that the women’s specialty retailer gets such an offer, it would be a premium of over 50% to its current market price. This would be hard to resist for Ann investors, as the company’s stock has gone up by only 15% during the last year. Therefore, we believe that if Golden Gate Capital pitches an attractive buyout offer, a majority of investors will push Ann for sale.
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Notes:- ANN INC. Enters into a Non-Disclosure Agreement with Golden Gate Capital, ANN INC., Oct 14 2014 [↩]
- Ann’s 13D filing [↩]
- Ann Taylor parent taps JPMorgan to weigh potential sales: sources, Reuters, Aug 26 2014 [↩]
- Golden Gate Capital [↩]
- Hedge funds say Ann Taylor could be worth $65 per share in potential sale, MSN Money, Sept 15 2014 [↩]