For the past few months, Aeropostale has been on the active radar as a takeover target by private equity firms. Retailers that have been bought out in the past few months include Gymboree, J.Crew, and Jo-Ann Stores. Aeropostale has seen real interest from private equity firms KKR and Blackrock. However, unlike its fellow retailers, Aeropostale not only passed up offers from potential buyers, but hired Barclays to defend against any type of takeover attempts. The price that the company was reported to turn down was an offer amounting to $40 per share. This is roughly a 60% premium from the most recent closing price. I love the job that management has done in the past, but believe they are making a significant mistake by not accepting this $40 per share offer. In the following paragraphs I am going to point out the pros and cons of a takeover of Aeropostale and why it would be beneficial for shareholders to go around management and accept an offer.
Pros of Potential Takeover:
1. Instant 60% price appreciation for shareholders (assuming $40 per share)
2. Buyout at 16 P/E ratio, which is high for a company with little to no near-term growth
3. Guaranteed money in investor's pocket, rarely available to shareholders
Cons of Potential Takeover:
1. Does not allow for future growth to be reflected for shareholders down the road
2. Forces investors to reallocate money to less desirable investments
Here's the way I came to my decision to be in support a hostile takeover. If the company chooses to stay public, the company must be able to explain how it can achieve more than $40 per share in a reasonable amount of time. I would consider a reasonable amount of time one year. Aeropostale has proven that it is an ultra-efficient operator and that it is quite profitable. However, now that the recession is over, there are significant headwinds that will hamper EPS growth in the coming years. Margins have been contracting in recent quarters, as same store sales are coming down from record marks set last year. To help solidify the earnings per share, the company has continued its store expansions with the Aeropostale and P.S. from Aeropostale concepts, as well as accelerate a highly successful buyback policy. I think that both of these decisions are excellent from a capital allocation point of view, but can only move the needle a little. For the current fiscal year ending January 31, 2011, Aeropostale will earn roughly $2.50 per share. Next year, the best case scenario for earnings is $2.75. In order to simply meet this $40 per share buyout offer, the company must trade at a 14.5 P/E multiple. For a company with slow growth, I find it quite questionable and even risky for the market to value the company at this level. The fact that the company is counter-cyclical does not help the company's cause for staying public. I believe that the true reason Aeropostale is staying public is for management to protect their jobs. I sincerely believe that if management held a large ownership stake a buyout would have already occurred. Though I love the job management has done and think that they could send the share price higher than $40 per share years down the road, the fact is that this outcome is not a 100% certainty and may take way too long. This is why I am advocating for shareholders to go around management and accept a buyout from private equity. I write this article not because I don't believe in management, but because I am a dedicated value investor who is more than willing to accept a great offer when he sees one. This company is worth much more to a private equity firm than the public market because of private equity's abilities to perform a leveraged buyout. I will try to send this article to the largest shareholders of the company and incite a call to action. I hope I have convinced you of being in favor of a buyout at all costs and would appreciate any help in spreading the contents of this message!
Disclosure: I am long ARO.
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