Ascena Group To Buy Ann In A Cash And Stock Deal

More than a week back, there were reports that Ann (NYSE:ANN) was in advanced one-on-one negotiations with Golden Gate Capital for a probable buyout. ^[1] Now, the women’s specialty retailer has been acquired by Ascena Retail Group, a women’s clothing retailer dominating plus-sized market, in a cash and stock deal that valued the former at just over $2 billion. According to the deal, Ann’s shareholders will be given $37.34 in cash and 0.68 of a share of Ascena for every share of Ann. Based on Ascena’s closing price when the deal was announced, Ann is worth close to $47 a share. The deal is expected to close by the end of the second quarter and upon closure, Ann’s shareholders will own about 16% of Ascena’s shares. After the deal was announced publicly, Ann’s share went up 20% and are currently trading at around $47. ^[2]

After consistent pressure from activist investors, much speculation  and Ann’s own efforts to look for potential suitors, a deal has finally come to pass. Ann had hired JPMorgan (NYSE:JPM) in late 2014 to look for possible sale options and it had even included Golden Gate Capital in the options review process. It all started when Engine Capital started pushing Ann’s management to consider a sale of the company, stating that the market wasn’t valuing it fairly at $1.8 billion. The activist investor believed that a strategic or financial buyer would willingly pay close to $50-$55 per share for the retailer. However even a year later, Ann’s market cap remained stable at $1.8 billion due to its lackluster performance, which put Engine Capital’s expectations to rest. Golden Gate Capital on the other hand valued Ann more reasonably at $2 billion and Ascena finalized the deal at just over $2 billion (based on its current market price).

Our price estimate for ANN stands at $40, which is about 15% below the current market price.

See our complete analysis for ANN

Ascena Group operates  stores throughout the U.S. and Canada across five different brands targeting so-called ‘tween girls (i.e., young adolescent), teenagers and adult women with casual, career and special occasion wear. Ann’s acquisition will help it further its reach in the market with the addition two popular upscale brands. Ascena generates close to $4.5 billion in revenues from 3,800 stores while Ann generates $2.5 billion from 1,100 stores. The acquired format is definitely more productive that Ascena’s existing business format, which is one of the factors that would have encouraged it to buy Ann. Among other factors are cost synergies and a strong combined financial profile, which make it an accretive acquisition. By the end of the third year post deal closure, the acquisition is expected to create annual synergies of $150 million. These synergies, coming from sourcing, procurement, distribution, and logistics, will help the combined company to generate a higher cash flow. The acquisition is said to be significantly accretive to EPS, which will increase substantially after the first year of combined operations, accelerating to more than 20% thereafter. ^[2]

This acquisition will now create a women’s specialty retail powerhouse with a massive 4,900 store network and revenues in excess of $7 billion. Such a vast network of stores will even allow Ann to aggressively progress towards its omni-channel goals, which could eventually propel topline growth. Ann is scheduled to release its Q1 fiscal 2015 earnings on May 22nd and during its call, we will look for the company’s future plans as a part of Ascena Retail Group, apart from its Q1 performance. After a few bumps early last year mainly on account of missed fashion calls and product imbalance, Ann’s main brands delivered improved performance in Q4 fiscal 2014, which they likely maintained in the recently concluded quarter.

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1. Golden Gate Capital in one-on-one talks to buy Ann Taylor – Sources, Reuters, May 6 2015 [↩]
2. Ascena Retail Group Inc. To Acquire Ann Inc. For $47 Per Share In Accretive Transaction, Ann, May 18 2015 [↩] [↩]