Will Ann’s Management Decide To Sell?

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After women’s specialty retailer Ann Inc (NYSE:ANN) reported disappointing Q2 fiscal 2014 results and slashed its revenue guidance for the full year, activist investor Engine Capital recommended that Ann’s management consider a sale of the company. This came as a surprise considering that Ann has been among the better performers in the U.S. even as buyers are looking for ways to save money. However, Engine Capital’s prime concern wasn’t the company’s performance. It believed that the market wasn’t valuing the women’s specialty retailer fairly and Ann could easily fetch around $2.5 billion, while its market cap stands at $1.8 billion.

Since Engine Capital, along with its affiliates, holds just a 1% stake in the company, it seemed that its suggestion might not have a strong influence on Ann’s management. However, the retailer hired JPMorgan (NYSE:JPM) to look into a possible sale immediately after the activist investor advised the company to sell itself. [1] Engine Capital and hedge-fund partner Red Alder LLC believe that potential buyers could pay a price of $50-$55 per share for Ann, which is almost 35% above its current market price. Sources close to the matter said that the investors were willing to launch a public campaign as they believed that Ann wasn’t moving fast enough.

Our price estimate for ANN stands at $38, which is about 10% below the current market price.

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  2. Ann Outlines Growth Areas Following Lackluster Q1 Results.
  3. Ascena Group To Buy Ann In A Cash And Stock Deal
  4. How Multichannel Retailing Is Pushing Ann Taylor’s Store Count Down
  5. Ann Taylor Reportedly In Talks With Golden Gate Capital For A Buyout
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See our complete analysis for ANN


Earlier this year, Golden Gate Capital disclosed a 9.5% stake in Ann, stating that it invested in the company from a long term perspective, and wasn’t pushing Ann’s management for a sale. Although it was likely that Golden Gate Capital’s influence on Ann’s management will be much stronger, the retailer’s recent moves suggest that it is seriously considering its smaller investors’ recommendations. [2]

The company reiterated in its recent press release that the board is always open to communication with investors. Ann also stated that it regularly reviews investor opinions and uses the services of financial advisers to better understand their recommendations. It may therefore be possible that Ann’s move to bring JPMorgan into the picture may not necessarily mean that it is fixated on finding a prospective buyer. However, should Ann find a strategic or a financial buyer who is ready to pay a significant premium for the company, it may face greater investor pressure.

In a recent investor presentation, 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. [3] Assuming that the women’s specialty retailer gets such an offer, it would be a premium of over 55% to its current market price. This would be hard to resist for Ann investors, as the company’s stock has gone up by only 10% during the last year. Therefore, we believe that if a retail chain or a private equity buyer pitches an attractive buyout offer, a majority of investors will push Ann for sale. However, at this point, management’s intentions are somewhat unclear. Although it has paid sufficient attention to its investors’ concerns and recommendations, only time will tell if they are serious about selling the company.

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Notes:
  1. Ann Taylor parent taps JPMorgan to weigh potential sales: sources, Reuters, Aug 26 2014 []
  2. Ann Inc. Responds to Engine Capital LP and Red Alder LLC, ANN INC., Sept 15 2014 []
  3. Hedge funds say Ann Taylor could be worth $65 per share in potential sale, MSN Money, Sept 15 2014 []