• Mark Watson-Mitchell

Heads you win – tails you don’t lose too much

I think that this one could be a good gamble.


Early last Friday morning, in response to recent press speculation, Sycamore Partners Management issued an announcement stating that it was in the early stages of considering a possible cash offer for Ted Baker (LON:TED).


The shares of the retailing, wholesaling and franchising menswear, ladieswear and accessories group had been creeping better all last week.


From around 87p last Tuesday they edged ahead to 93p by 15.30hrs on Thursday, within the hour they were trading at 100p. There were some 10.4m shares traded that day, nearly eight times the daily average volume.


Insider trading perhaps because the City really is a ‘leaky’ old place.


On Friday morning Sycamore confirmed that an offer was possible.


A couple of hours later Ted Baker declared that it had not, as yet, received any approach from Sycamore.


The company stated that it had continued to make good progress with its transformation and is emerging from Covid as a stronger and more financially sustainable business.


“The board is confident in the company's independent prospects and would evaluate any offer for the company against the strong shareholder value creation that it believes can be delivered as a standalone company.”


It stated that there can be no certainty that any firm offer will be made so shareholders were urged to take no action at that time.


The shares opened at 110p, then touched 121p before closing on Friday night at 115.50p on the back of some 10m shares dealt.


On Monday morning they opened at 118.60p and hit 137.30p at their best. During the day well over 6m shares were transacted, closing up 8.5p at 124p.


Ted Baker – the business


Since 1988 the group has grown steadily from its origins as a single shirt specialist store in Glasgow, to the global lifestyle brand that it is today.


Ted Baker offers a wide range of collections including Menswear, Womenswear, Accessories, Bedding, Childrenswear, Eyewear, Footwear, Fragrance and Skinwear, Lingerie and Sleepwear, Men's Underwear and Loungewear, Neckwear, Rugs, Suiting, Technical Accessories, Luggage, Wallpaper, Gifting and Stationery, Jewellery, and Watches.


The group distributes across five continents, it has 377 stores and concessions worldwide, comprising 97 in the UK, 81 in Europe, 95 in North America, 95 in the Middle East, Africa and Asia, and 9 in Australasia.


It operates through its three main distribution channels: retail including eCommerce, (representing some 70% of sales); wholesale (around 20%); and licensing (over 10%).


On an approximate sales per region basis the UK makes up 60% of revenues, the US 30%, and the Rest of the World makes up 10%.


In the 2021 trading year to end January it saw sales of £352m and a mighty £59.2m loss.

For the last year, to end January 2022, estimates are for some £425m of sales and an almost halved loss at £30m down.


Market expectations for the current year, taking benefit from the various transformational management measures getting underway and the return of more normal trading,

suggests £525m of sales and a much healthier £22m profit, worth about 9.5p per share in earnings.


Further down the line £560m of sales are pencilled in for next year, worth a hopeful £31.5m of profits, generating some 13.5p per share in earnings.


In those same periods the group’s net cash balances are expected to move from £3m for the period to end January 2022, then going up to £36m by the end of the current year and closer to £66m next year – all showing some significant recovery.


So, who is Sycamore Partners Management?


Sycamore Partners is a private equity firm based in New York.


Since its inception in 2011 it has aggregated $10bn in committed capital. It has a globally diversified investor base of prominent endowments, foundations, funds of funds, family offices, insurance companies, pension plans and sovereign wealth funds.


The founders of Sycamore have a long history of partnering with management teams to improve the operating profitability and strategic value of their businesses. They work with companies they believe have significant growth potential, particularly when given the capital and outside expertise they need to succeed.


It specialises in consumer, distribution and retail-related investments.


Sycamore Partners Management has around 80,000 employees across all of its locations and generates $36.41bn in sales. There are some 3,028 companies in its corporate family.


Now what is going to happen?


So, Sycamore is no ‘penny ante player’ it has the funds and the ability to do a ‘real number’ on Ted Baker.


It would be a cash bid for the lifestyle brand group, just as it is coming out of a real shaker of the last few years trading.


The final results for the group’s trading year, the 52 weeks to 29 January 2022, will be announced on 26 May.


The question is – will it still be independent by then or will it have succumbed to offers from private equity or, for that matter, from any other corporate player?


So, is it a fair bet that Ted Baker will be taken out, and if so at what price?


My View


The group’s shares closed last night at 124p, up 8.5p on the day, with well over 6m shares traded.


I would reckon that if Sycamore does pursue Ted Baker with a cash bid, then around 150p would be my initial Target Price.


However, if the group is spirited enough to defend hard its value and sticks out for a higher bid, then who knows where it might end.


My thoughts are that it would be totally wrong for the brand to disappear overseas for the wrong price, like so many other UK companies have done recently.


It is not outlandish to perhaps pencil in a further Target Price of 180p a share cash as the winning price being paid by the ‘victor’.


Heads you win, tales you don’t lose too much


So, from this price it is a fair gamble that a much higher bid will ensue.


And if it does not and the shares fall back in response, I do not think that they would ease too much, before the group’s recovery becomes very evident and they start improving in price again.


(Profile 14.07.21 @ 139p set a Target Price of 175p)


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