J. Crew union based on more than money?…

December 16, 2010

Theoretically, J. Crew Group, Inc. (JCG) is entertaining takeover offers from other suitors until 11:59 p.m. on Jan. 15, 2011; a minute later, and it agrees to tie the knot with private equity fund TPG Group Holdings Advisors, Inc. and affiliates of private equity firm Leonard Green. But that doesn’t mean that all suitors are equally attractive, and it’s pretty clear from the pre-merger proxy that J. Crew filed last week that its senior executives have millions of reasons – many monetary, some not – to prefer this union over others.

Of course, there’s history between J. Crew and TPG. In 1997, TPG’s affiliates acquired a tad more than 85 percent of the company, a majority stake held until the 2006 IPO reduced its ownership to about 39.2 percent. But nostalgia only gets a suitor so far, so it’s nice that there is plenty of money to sweeten the deal.

If it goes through, thanks to the accelerated vesting of his equity awards, Chairman/CEO Millard “Mickey” Drexler will get almost $151.46 million… just for his stock options. He’s also got 10,000 restricted shares worth another $435,000. And if Drexler owes any excise taxes on his change in control payments, J. Crew has agreed to pay them on his behalf. According to the filing, that could amount to $0, or it could be as much as $3.2 million; it all depends on whether the company keeps Drexler after the merger occurs and other criteria are met.

Drexler’s commitment to the deal is clear: On behalf of himself and trusts he controls, he’s rolling over 2,287,545 shares of stock (including 20,000 restricted shares) worth nearly $100 million in exchange for a serious stake in the new J. Crew.

A couple of months ago, when the parties were hammering out the terms of the deal, according to the filing, members of special committee

“…concluded based on Drexler’s statements at the meeting that Mr. Drexler would be unwilling to work for any third party other than TPG.”

However, Drexler softened that stance a few weeks later, even informing the board (at a period of time during which negotiations with TPG and Leonard Green had broken down) that “he would be open to continuing his employment with the Company following a sale to an acquiror other than TPG.” We know from the lengthy Background of the Merger section in the filing (pages 18-34) that Drexler also subsequently offered to “actively engage in the solicitation of alternative proposals in connection with a post-signing ‘go shop’ period, and he recused himself from the board’s decision to do the deal with TPG.

But does Drexler’s stance mesh with events? Some might wonder, based on some of the unusual facts surrounding the deal, as chronicled by this Wall Street Journal commentary – including a slew of close ties and quiet conversations between company and TPG officials.

Of course, the deal will give millions to executives other than Drexler, as well. In distant second place – but still doing quite well for herself – is J. Crew’s style icon, Jenna Lyons, who is the President and Executive Creative Director. She’s poised to get more than $11.4 million for her stock options. (Nearly 59 percent of those are currently unvested, but – thanks to accelerated vesting – will nonetheless bring her close to $6.69 million.) Lyons will also get another $2.175 million for her restricted shares. If the company terminates Lyons after the deal closed (and there’s a snowball’s chance of that happening…), she’ll also get severance pay; but some (perhaps most) in the fashion industry believe that Lyons will stay with J. Crew as long as Drexler does.

Going private certainly has advantages beyond showering senior executives with gobs of money. For example, the executives and directors will be able to grow and steer the company as they wish, without answering to shareholders every quarter when the sales numbers are released. But until 12:00 a.m. on January 16, 2011 – theoretically, at least – anything can happen.

Image source: Derek Purdy via flickr

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