Talbots takes J. Jill

In a turn of events befitting a soap opera, apparel merchant The Talbots on Feb. 6 announced its purchase of fellow cataloger/retailer J. Jill for $517 million, or $24.05 per share. The acquisition, subject to Hart-Scott-Rodino antitrust clearance, is expected to close by May.

Multibrand apparel manufactuer/marketer Liz Claiborne had been trying to acquire J. Jill for the past two years (see “An offer J. Jill can’t refuse?”, February issue), but the Quincy, MA-based company rebuffed Claiborne’s repeated offers. In its last offer prior to the Talbots announcement, Claiborne on Nov. 18 offered $366 million, or $18 a share — 41% more than J. Jill’s Nov. 17 closing price of $12.76 a share.

Now Talbots is paying 34% more than Liz Claiborne was willing to, and 85% more than J. Jill’s Nov. 17 closing price. Talbots will finance the transaction with a $400 million loan and cash, according to a release. J. Jill will continue to operate under its name and will retain its Quincy headquarters.

Founded in 1947 and based near J. Jill in Hingham, MA, Talbots operates nearly 1,050 stores throughout the U.S., Canada, and the U.K. and mails about 46 million catalogs a year. The company has expanded its line of classic women’s apparel to include baby and children’s apparel, accessories, and most recently, men’s clothing, but it has never acquired another company or seemed to have any interest in doing so.

But apparently, Talbots had quietly put feelers out for J. Jill in early 2005. Talbots chairman Arnold Zetcher and J. Jill’s president/CEO Gordon Cooke met about a year ago, says Talbots spokesperson Margery Myers, at which time Zetcher told Cooke that if Jill was ever thinking of being acquired, “that was something that Talbots would be interested in.”

The publicity surrounding Liz Claiborne’s plans, “provided an opportunity to move ahead in something we had already been interested in,” Myers says. “It enabled us to move forward more quickly.”

Indeed, some say it was a miscalculation on Claiborne’s part to go public with its intentions to acquire J. Jill. “What was meant to put pressure on J. Jill to accept Claiborne’s offer had the opposite effect,” says one source close to the situation, who spoke on the condition of anonymity.

A high price to pay?

As private equity buyers such as Golden Gate Capital snap up women’s apparel merchants, the $1.8 billion Talbots may have feared becoming a small player backed into a corner. “There’s so few companies left of size in catalog and retail that have critical mass,” says Craig Battle, managing director for Princeton, NJ-based investment bank Tucker Alexander. “It’s survival of the biggest.”

David Solomon, managing director for New York-based investment bank Goldsmith Agio Helms, agrees with Battle. “J. Jill is attractive strategically,” adding that the aging baby boomers have made contemporary fashion for women over 35 a fast-growing market segment. Not only is the audience a large one, but consumers in that demographic have higher discretionary income than their younger counterparts.

But while middle-aged women place a priority on comfort, they don’t want to sacrifice trendiness, which Solomon says points to a Talbots weakness. “Talbots’ traditional clothing has less growth potential, and the company was being left in the dust with their old-school positioning,” he says.

There’s about a 20% overlap between the Talbots and J. Jill customer files, according to Talbots research. Talbots is no doubt hoping that J. Jill’s core audience of women 35-55 years old can act as a feeder system of names for Talbots, which targets women ages 45-65.

Also, the companies expect to find about $25 million in cost savings by reducing duplicative back office functions such as finance and administration. What’s more, Talbots’ Lakeville, MA, distribution center is already at capacity, and the company was about ready to build a second distribution center. J. Jill’s Tilton, NH, distribution center has excess capacity and can accommodate Talbots’ additional merchandise.

Nonetheless, some observers are scratching their heads at J. Jill’s high price tag. “That’s a big number for an underperforming company,” says Tucker Alexander’s Battle. Much of J. Jill’s recent rise in revenue, from $347.6 million in fiscal 2002 to about $450 million for fiscal 2005, is due to its retail expansion. Total retail sales during that period increased 86%. Combined catalog/Internet sales for 2004 were $191.0 million, down almost 5% from $200.2 million in 2003, on a 2% cut in circulation.

“Talbots paid approximately 19.3 times earnings before EBITDA [earnings before interest, taxes, depreciation, and amortization],” says Solomon of Goldsmith Agio Helms. “That is a huge multiple for a business with some concerning negative trends, such as declining same-store sales. Let’s assume that they only achieve 50% of the synergies, which would be $12 million, then the implied post-synergy EBITDA would be $35 million, and the multiple would be 12.7 times EBITDA.” That’s still aggressive and far higher than Talbots’ 6.4 times trading multiple. “If you give them 100% credit for all the projected synergies, you’re still at 9.3 times EBITDA,” Solomon says.

It’s not surprising that another party who thinks Talbots overpaid is spurned suitor Liz Claiborne. Its chairman/CEO, Paul Charron said in a statement, “We are disappointed that we were unable to acquire J. Jill at a price that makes sense for our shareholders. However, we are financially disciplined and will not overpay.”

Front-end back-end benefits

For Talbot’s part, “we looked at it very closely and paid a price we felt appropriate,” spokesperson Myers counters. As for J. Jill’s disappointing performance during the past few years, “what J. Jill is going through is normal growing pains for a company starting out as a catalog and shifting into a multichannel model,” she says.

Because the two companies have “nearly identical business models in terms of being multichannel retailers,” Myers continues, Talbots will be able to help J. Jill balance its channels. For instance, she says, J. Jill might position the catalog as more of a store-support vehicle with an even greater breadth of merchandise.

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