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True Religion Apparel, Inc. (TRLG), Abercrombie & Fitch Co. (ANF): Buyout Attracts Enthusiasm, But Will It Change the Industry?

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Investors were alternately intrigued and dismayed by the recent announcement that big-name apparel maker True Religion Apparel, Inc. (NASDAQ:TRLG) had accepted a private equity buyout offer valued at nearly $830 million. As many market-watchers and bloggers have noted, the company’s fortunes have declined in the face of post-recession frugality among formerly glib American clothing shoppers. After several straight quarters of sub-par performance, it appears that True Religion Apparel, Inc. (NASDAQ:TRLG)’s management team has finally bowed to pressure from its shareholders and taken an important step towards turning the company around, similar to other fashion brands.

True Religion Apparel, Inc. (NASDAQ:TRLG)

Of course, True Religion Apparel, Inc. (NASDAQ:TRLG)’s decision to go private is not guaranteed to fix all of the structural issues that have plagued the firm. However, it is also true that restructuring efforts tend to hit fewer roadblocks in “private” settings. More importantly, True Religion Apparel, Inc. (NASDAQ:TRLG)’s decision to go private may indirectly impact the fortunes of other major apparel makers. Investors who wish to learn more about this specific deal would also do well to investigate other companies that find themselves in similar positions.

True Religion and the Competition

True Religion Apparel, Inc. (NASDAQ:TRLG) has several well-known competitors. Two of the most prominent are Abercrombie & Fitch Co. (NYSE:ANF) and VF Corp (NYSE:VFC).

Financially, each company has its own set of issues. For starters, True Religion Apparel, Inc. (NASDAQ:TRLG) undoubtedly has the smallest footprint of the three: Its market capitalization of about $820 million is dwarfed by VF’s massive $20 billion valuation as well as Abercrombie & Fitch Co. (NYSE:ANF)’s impressive $4.2 billion figure. With a total profit of about $36 million on 2012 revenues of over $480 million, True Religion remains profitable. However, its earnings for the most recent quarter decelerated by an alarming 95 percent. By contrast, VF earned over $1.1 billion on revenues of about $11 billion and saw its most recent quarter’s earnings grow by about 25 percent. Abercrombie & Fitch Co. (NYSE:ANF) earned $237 million on revenues of $4.5 billion and enjoyed eye-popping earnings growth of more than 300 percent.

Meanwhile, True Religion has nearly $200 million in cash and no debt. With about $300 million in cash and $2 billion in debt, VF has a more conventional balance. Fortunately, the company enjoys a cash flow figure of more than $800 million. Abercrombie & Fitch Co. (NYSE:ANF) has an ample cash flow, solid cash reserves and very little debt.

Terms of the Proposed Buyout

Under the terms of the proposed deal, private equity firm TowerBrook Capital Partners has offered to issue payments of $32 per share to True Religion shareholders of record as of a yet-to-be-determined record date. Relative to the company’s current share price of about $31.70, this represents a premium of around 1 percent. It is noteworthy that the public release of the deal’s framework coincided with a poor quarterly earnings report that saw True Religion miss market-watchers’ earnings expectations by 30 percent.

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