TALBOTS INC TLB
December 07, 2011 - 8:47pm EST by
mojoris
2011 2012
Price: 2.60 EPS $0.00 $0.00
Shares Out. (in M): 71 P/E 0.0x 0.0x
Market Cap (in $M): 181 P/FCF 0.0x 0.0x
Net Debt (in $M): 165 EBIT 0 0
TEV ($): 346 TEV/EBIT 0.0x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.

Description

TLB has been written up on VIC before, so for more background on the company please re-visit those write-ups on 12/22/2010 by Sandman and as far back as 10/25/05 by Paul 118.
 
Entry Catalyst #1: On December 5th, Trudy Sullivan, the Company's President and Chief Executive Officer retired
 
Entry Catalyst #2: Sycamore Partners has offered to purchase all the common stock for $3 / share (http://www.talbotsinc.com/ir/ir.asp)

Exit Catalyst: Sale of the company. This investment thesis is not predicated on a public company turnaround of TLB. The only reason for making an investment in TLB at this time is that there is a reasonable probability of a transaction in the near future. 

Estimated Duration: 175 days: includes up to 45 days for due diligence and negotiate a definitive merger agreement with Sycamore and simultaneously run a go-shop; customary transaction approvals including Board of Director approval, shareholder approval; and various regulatory approvals including the SEC proxy filing and anti-trust

Some Background:
On August 2, Sycamore Partners filed a 13D and disclosed a 9.9% position in TLB -http://www.sec.gov/Archives/edgar/data/912263/000110465911041970/0001104659-11-041970-index.htm
TLB responded to the filing and substantial ownership disclosure by hiring investment banker, Perella Weinberg. They were hired to defend TLB and installed a poison pill capping the ability for Sycamore to purchase additional stock and to protect against a creeping takeover. Interestingly, Sycamore is not a "typical" activist investor. Sycamore is a private investment firm founded by Stefan Kaluzny. Stefan was formerly a super star retail / turnaround investor at Golden Gate Capital, which is a tremendous turnaround private equity firm. To see a list of some of the successful deals that GGC has done including California Pizza Kitchen, Zale, Eddie Bauer, and Herbalife, go to www.goldengatecap.com. Stefan was responsive and worked a number of successful retail deals including Express (Chairman) and J. Jill (which GGC purchased from TLB in 2009). Stefan is also on the board of directors of a number of other companies.
 
Background on Stefan and the bid:
-http://finance.fortune.cnn.com/2011/01/23/update-ex-golden-gate-partner-forming-own-firm
-http://dealbook.nytimes.com/2011/12/06/sycamore-makes-takeover-bid-for-talbots
-http://www.bloomberg.com/news/2011-01-22/golden-gate-capital-s-kaluzny-to-leave-private-equity-firm.html
-http://www.zalecorp.com/boardofdirectors.aspx
-http://www.sycamorepartners.com
-http://www.reuters.com/article/2011/12/06/talbots-idUSL3E7N660D20111206
 
 
 
What can we learn from the Sycamore letter filed in the 13D  (http://www.sec.gov/Archives/edgar/data/912263/000110465911067909/a11-31189_1ex1.htm)
on December 6 (my interpretation is in parentheticals)?
 

December 6, 2011

 

The Board of Directors

c/o Mr. Gary M. Pfeiffer

Chairman of the Board of Directors

The Talbots, Inc.
One Talbots Drive
Hingham, MA 02043

 

Dear Mr. Pfeiffer:


As one of Talbots’ largest shareholders, we are concerned by the Company’s rapidly deteriorating performance (I purchased stock on behalf of Sycamore at a cost of $2.97 and your poison pill has prevented me from averaging down).  We believe we are not alone in our concerns about the Company’s current condition and future direction (we have spoken to current and past shareholders and consulted bankers).  Since we acquired our 9.9% stake in the Company this past summer, Talbots has:

 

·                  Announced the retirement of President and CEO Trudy Sullivan without identifying a suitable replacement (we have a deep bench of operators we can hire once the deal closes);

·                  Warned that the Company’s critically important holiday shopping season will be “challenging” and “highly promotional”;

·                  Dismissed its Chief Creative Officer and failed to hire a replacement (you need someone to help your retain and hire new talent);

·                  Announced disappointing second and third quarter financial results, recording losses from continuing operations of $37.4 million ($0.54 per share) and $22.1 million ($0.32 per share), respectively;

·                  Reported that it ended the third quarter with $19.3 million in cash, that it had used $124.9 million of its $200 million revolver and had added trade payable financing through Li & Fung of $39.4 million, causing concerns about the Company’s liquidity position and negatively impacting the equity value of any strategic transaction the Company may seek to entertain; and

·                  Watched as the Company’s stock price continued its multi-year decline, reaching $1.56 per share as of the close of trading on December 6, 2011, which represents a total market capitalization of less than $115 million (Time is of the essence, let me get in there and do what I do best, which is turnaround and capitalized businesses effectively). 

Given the Company’s rapidly deteriorating situation during the critical holiday shopping season, we believe expeditious action is needed to protect shareholders’ investment in Talbots.   As a result, we are prepared to acquire all of the remaining issued and outstanding shares of Talbots not owned by us or our affiliates at a price of $3 per share in cash (my cost basis is $2.97 so if there is another buyer, I can do no worse than break-even).

Our proposal represents a premium of 92% to the closing stock price of $1.56 on December 6, 2011 (this is essentially irrelevant since every $1 change is $70mm in the transaction price).  We believe this represents a compelling opportunity for shareholders to protect their investment in Talbots and that Talbots’ shareholders would welcome the certainty of a significant all-cash premium for their shares (i.e. I need to protect my own 9.9% investment since this is the first investment I am making from my new PE fund).  If the Board were to provide us with access to information, we could potentially get to a position where we would consider increasing our offer for the Company (let me do some due diligence, and I will bump the offer to $3.50-$4 to get a deal done). 

Upon our request, the Talbots’ Board had the Company’s CEO and CFO meet with us several weeks ago.  Since this meeting, the Talbots’ Board has rebuffed our efforts to conduct meaningful discussions regarding potential value-enhancing transactions, which we believe would be in the best interest of all of the Company’s stakeholders.  Any further delay in engaging in constructive discussions about a potential transaction will only further challenge the Company’s ability to achieve a premium valuation for its shareholders.

While the Company has struggled during the execution of its turnaround plan, recent results have deteriorated at a dramatically faster rate and magnitude (I would have paid a higher premium in September if you had invited me into the board room and accepted my help).  Nonetheless, we believe that Talbots has significant potential and remains a premier, storied brand (I will be able to sell this to another strategic buyer in 3 years or re-IPO).  We also believe, however, that the steps necessary to maximize the value of Talbots’ assets will require more aggressive action than has been taken to date and which would be extremely difficult to execute while remaining a public company (I don't have time for earnings calls and reporting to a wide shareholder base. I need to work aggressively, swiftly, and clean house ASAP).  Sycamore’s principals have extensive experience in improving the operations, profitability and strategic value of their businesses by providing the capital and expertise that enables companies to succeed (we not only have access to various financing sources to help with this difficult situation, we have access that you do not have under the current leadership).  In one recent example, Sycamore established Mast Global Fashions as one of the world’s largest independent apparel sourcing companies in partnership with Limited Brands.  Other than Sycamore, we believe there are, at best, a very limited number of potential acquirers who have the relevant experience, skills, interest and capital to invest in a struggling apparel company such as Talbots (I doubt anyone will pay more than us, unless they have a similar PE/turnaround mandate, and no strategic buyer will come near you until you clean yourself up). 

We are standing by to meet with you and your advisors as soon as possible to discuss our proposal and answer any questions you may have.  We are ready to proceed immediately and, with the Company’s full cooperation, we believe we can complete our confirmatory due diligence, arrange to rollover or replace the Company’s existing working capital financing and execute definitive documentation within 45 days (only require confirmatory due diligence as they know TLB well, and have a financial plan ready to execute).  Given the Company’s rapidly deteriorating financial performance, we are concerned that any further delays in initiating a strategic process increases the risk of further destruction of shareholder value.

While we remain optimistic that we can reach an agreement that benefits all of Talbots’ shareholders in a timely manner, we are committed to protecting the value of our investment and, consequently, we are prepared to pursue any and all actions available to us in order to ensure that the Talbots Board actively and thoughtfully explores strategic alternatives, including our compelling proposal (we will exercise all of our corporate governance rights.and gain control of this company so we don't lose anymore money; and we are not going away)

We look forward to hearing from you.

Sincerely yours,

Stefan Kaluzny 

Takeaways:
-TLB will be acquired for greater than the current trading price of $2.50, with a reasonable probability for greater than $3/share
-Other shareholders will probably put pressure on TLB management privately, and some holders could be more vocal publicly
-Sycamore is not going away, at least in the near term with their cost basis at $2.97/share. Sycamore has all the resources they need to get a deal done, friendly or hostile, can close as they have equity and debt financing and are willing to take on all the execution risk as a private company
Perella Weinberg is highly motivated to close a deal vs trying to defend this company until its insolvent (1-2% M&A Fee vs $100k fee for the poison pill they put in place and a valuation slide deck)
-TLB management will make more money via change of control agreements than running TLB into the ground and flushing the equity. In addition, if TLB ends up filing for Chapter 11 bankruptcy protection, I doubt management will be involved in the creation of the new co and will not receive future incentives.

Near Term Scenarios:
-Sycamore does confirmatory due diligence and bumps: $3.50-$4.00 (35% probability)
-Sycamore closes on terms and shareholders accept current proposal, most likely after a go-shop period: $3 (20% probability)
-Another buyer emerges: $4 (15% probability)
-TLB continues to delay, hires new CEO, and attempts to turnaround on its own: $1.50 pre-deal price (20%)
-Sycamore pulls offer, attempts to sell its 9.9% of stock, company needs to raise highly dilutive equity, or TLB files for Ch 11: $0 (10%)

Probability weighted price = $2.82 or 7% discount to $3 offer price. I would pay up to $2.82 to own the optionality of a bump. I have not included a scenario for a bidding war, but I believe that probability is not zero.

Risks to Consider: 
-Sycamore gives up and sells their stock ("we are prepared to pursue any and all actions available to us in order to ensure that the Talbots Board actively and thoughtfully explores strategic alternatives, including our compelling proposal" = unlikely)
-Business is much worse than detailed on recent earnings call and the deterioration accelerates (possible)
-Delay: the company engaged an executive search firm, and will attempt to see this process through (possible, but holders will increase pressure)
-Where would TLB be trading if Sycamore was not involved and the CEO had just resigned after very poor results and a discouraging earnings call? At ~0.10x price/sales or $1.50/share seems reasonable, but without a credible operating plan with access to capital beyond the current drawn revolver the common stock might be permanently impaired and could be lights out (likely). Based on this last risk, Sycamore has a lot to lose

Catalyst

-Sale of the company to Sycamore Partners or another potential buyer
    sort by    
      Back to top