Why Ricky Sandler Gave The Men’s Wearhouse a Lesson in M&A 101

Ricky Sandler’s Eminence Capital revealed yesterday, Nov. 7^th, that it holds a 9.8% stake in The Men’s Wearhouse, Inc. (NYSE:MW), one of the largest specialty retailers of menswear in the U.S. and Canada. The fund’s holdings are worth roughly $214 million.

Mr. Sandler has been known for taking activist positions in the past, and this case was no exception:

His fund sent a letter to the The Men’s Wearhouse Board of Directors, expressing its disappointment with their answer to Jos. A. Bank Clothiers Inc (NASDAQ:JOSB)’s proposal of acquiring the company’s outstanding shares for $48 each. The company stated the reason for the rejection: “the Proposal significantly undervalued the Issuer [The Men’s Wearhouse] and failed to reflect its growth strategy and upside potential.”

However, according to Sandler, a higher bid could arrive any time soon, explaining to the company, “we know from historical M&A practice that acquirers rarely put forth their best price in their first offer.”

We doubt The Men’s Wearhouse needs a lesson in M&A 101, but it’s clear that Sandler and Eminence have a point. Since its inception in 1998, Eminence Capital has achieved close to a 13% net annual compounded return.

From a broader standpoint, 23 of the hedge funds that we track hold positions at The Men’s Wearhouse. The largest stockholders in terms of value are: David Gallo’s Valinor Management Llc, Glenn J. Krevlin’s Glenhill Advisors, Ken Griffin’s Citadel Investment Group and Chuck Royce‘s Royce & Associates.

In addition to declaring ownership of The Men’s Wearhouse stock, Eminent Capital has had some other recent filings with the Securities and Exchange Commission. For instance, over the last few months, the company acquired shares of Group 1 Automotive, Inc. (NYSE:GPI), Sonic Automotive Inc (NYSE:SAH), Aeropostale Inc (NYSE:ARO) and VCA Antech Inc (NASDAQ:WOOF).

Shares of The Men’s Wearhouse currently trade near $46, so even in the cheapest M&A scenario that’s been proposed, there’s upside of $2/share here. It’s likely Eminence foresees an acquisition offer north of at least $50 (the highest Wall Street PT is above this mark), which explains why the fund is so bullish on the merger-arb opportunity.

Disclosure: none