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J.Crew, Fast Retailing Merger Collapses; Was J.Crew Positioning Itself for an IPO?

Negotiations between Fast Retailing Co., the owner of Uniqlo, and preppy clothier J.Crew regarding a merger of the two officially collapsed. Speculations among industry experts abound regarding the cause of the breakdown.

Some are suggesting that the discussions soured because J.Crew opined on the unfolding deal too candidly in the public eye, rattling Fast Retailing’s owners. Others have hypothesized that J.Crew was using the possibility of the merger to bloat its own valuation in advance of a planned Initial Public Offering (IPO) that is now more likely than ever to happen.

For weeks, rumors have circulated that TPG Capital and Leonard Green & Partners, the private equity firms that acquired J.Crew in 2011, were seeking $5 billion for the retailer. That number represents a seismic leap from what J.Crew was bought for the last time it went up for sale: $2.4 billion. Many experts point out that was merely three years ago. Also, a $5 billion price tag entails a valuation of J.Crew that’s more than fourteen times its adjusted earnings, calculated independent of interest, taxes, depreciation and amortization.

Speaking to Bloomberg, Trevor Kaufman, a retail analyst at Sky Harbor, said, “For a company that size, that’s a pretty high multiple. That would be a tremendous deal.” Compare J.Crew’s valuation to the median multiple for the retail industry in the last decade: 0.6.

It’s not clear that a public market valuation for J.Crew would yield such a high multiple. H&M’s value was recently assessed at 17.5 times Ebitda, but the Gap only registered 7.3 times. However, J.Crew’s price has to be understood in the context of Fast Retailing’s ultimate goal to penetrate U.S. markets and quadruple its sales to $49 billion by 2020. According to Ashma Kunde, the acquisition of J.Crew is an important part of that overarching strategy. She said that Fast Retailing “needs something instant if it wishes to come close to that target” and that the absorption of J.Crew “would bring Fast Retailing a big step closer to achieving its American dream.” She continued, “The company could not have picked a more suitable target.”

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It would take a colossal company to acquire J.Crew, which operates more than 400 stores in the U.S, U.K. and Canada. For the fiscal year that ended this February 1, it reported revenue totaling $2.4 billion, a brisk 9 percent increase over last year.

Fast Retailing certainly would have had no trouble financing the purchase of J.Crew. Currently, it sits on $3.16 billion in cash reserves. Experts say that even if it did pony up the full $5 billion purchase price it would have had no difficulty managing the financial machinations of an acquisition.

The bid for J.Crew was Fast Retailing’s boldest in a naked grab at the U.S. apparel market, one more step toward its goal to become the world’s premier provider of apparel. Uniqlo chief executive Tadashi Yanai believes a more aggressive positioning in the U.S. is a central feature of its intention to become the world’s largest retailer by 2020. Currently, Uniqlo maintains seventeen stores in the U.S. and intends on launching as many as thirty more annually to reach 100 in the next few years. Globally, there are over 1,300 Uniqlo stores. Executive vice president Yoshihiro Kunii said, “New York, London, Paris – these are at the forefront of the fashion industry. To establish ourselves in these markets is crucial.”

Yanai also considered buying Gap Inc. at one point and closely studied their apparel design, mining it for inspiration for Uniqlo’s lines. Some say he has closely modeled much of the chain’s casual wear–including T-shirts and sweats–on the Gap’s own aesthetic.

Fast Retailing Co. sees further penetration into the U.S. market as one part of an ambitious plan to expand globally. Business for Fast Retailing Co. has been booming. Its sales surged 22 percent to 389 billion yen ($3.76 billion) in the last three months ending in November. Net income leapt 8.8% to 41.8 billion yen ($398 million) for the same period. The company’s shares grew an astonishing 99 percent in Tokyo trading for 2013, swelling its market value to 4.6 trillion yen.