Six years ago today, TPG and Leonard Green & Partners (LGP) finalized their take-private buyout of J.Crew for $43.50 per share, or just about $3 billion. But the controversy surrounding the deal began long before its completion. J.Crew’s December 2010 preliminary proxy statement regarding the takeover detailed a slipshod auction process led by Drexler, who negotiated on his own with the two private equity firms for seven weeks before informing the J.Crew board, among other potential improprieties.
Drexler, who made his name turning the Gap into a retail stalwart, purportedly refused to work with any strategic acquirer besides TPG and LGP. A lesser executive might not have had such sway, but the industry consensus regarding Drexler’s managerial brilliance provided him tremendous leverage over the J.Crew board. That combination of factors led to a lawsuit from the company’s shareholders, alleging a dereliction of financial duty. But J.Crew reportedly settled for a pittance, and the deal ultimately went through. Drexler, for his part, was well compensated on the transaction: He cashed out $200 million on the deal in exchange for reducing his ownership stake in J.Crew from 11.8% to 8.8%.
From TPG and LGP’s perspective, all that drama was supposed to be worth it because Drexler would reshape J.Crew into a money-making machine. Only that hasn’t quite happened. Instead, the company has been overwhelmed by the same array of forces—most significantly the rise in online shopping—that have helped diminish a number of its traditional big-box retail peers.
While TPG and LGP have collected a reported $685 million in dividends since taking over J.Crew, plus another $10 million-plus in management fees, it seems unlikely their investment in the retailer has played out as planned. With revenue declining and EBITDA plummeting in recent years, the company was unable to support the billions in debt forced onto its balance sheet by its private equity owners. Last March, TPG slashed the paper value of its stake from $479 million to $76 million, according to Bloomberg, writing off more than $400 million in value.
In many ways, the tale is a parable for a certain kind of private equity deal. The idea of loading up a company with debt and bringing in a superstar executive to transform a business is all well and good; but factors outside of a firm’s control sometimes converge unexpectedly, and only one or two of those unforeseen variables need tilt the wrong way to transform the prospect of solid returns into an investment gone hopelessly awry.
[This day in buyout history: On February 15, 2012, the rapid rise of Blue Coat begins]
[This day in buyout history: On February 6, 2007, MDP sniffs out a deal]