Fashion friction

You’d think that a big-name chief executive telling people that he’d only consider working with your private equity firm would be something to celebrate.

And yet the renewed vows between retail visionary Mickey Drexler and private equity giant TPG Capital also gave rise to a very public headache, albeit one that ultimately wasn’t very financially punishing for the privatisers. 

The lawsuits that accompanied the privatisation of retail company J. Crew Group highlight an interesting potential conflict that arises in such transactions – a CEO that favours a private equity-backed take-private is required to essentially act against his own self-interests and look for bidders with whom he may not want to work, as well as seek out offers that may be more than the CEO – himself a buyer – wants to pay.

Indeed, one of the charges leveled against Drexler was that he told people that he would only consider taking J. Crew private if TPG were leading the deal. Between the mid-1990s and the mid-2000s, Drexler, the well-known former CEO of The Gap, personally made hundreds of millions turning around the operations of J. Crew, which had been taken private by TPG.

In 2010, with consumers around the world continuing to be hesitant, TPG and Drexler again struck a plan to take the retailer private, this time with Los Angeles buyout firm Leonard Green & Partners.

Class-action lawsuits almost always pop up when a company is taken public – shareholders complain that the proposed acquisition price should have, could have been higher. They often allege that the CEO and senior executive leading the deal are artificially keeping the price down so as to enjoy a better personal return-on-investment when the deal is later exited. 

The flurry of suits against Drexler and TPG gained added attention because J. Crew is such a well-known brand and because Drexler is somewhat of a celebrity executive.

Court documents show the defendants denied “any and all allegations of wrongdoing, fault, liability or damage”.
Ultimately, J Crew was sold to TPG, Leonard Green and top executives in a deal worth $3 billion. After several attempts to resolve their differences, the buying group agreed to pay public shareholders an additional $16 million, which may or may not have been the difference in price that a greatly expanded auction process would have yielded.
A timeline of TPG’s history with Drexler and J. Crew reveals big profits, tight relationships and allegations that Drexler and his friends at TPG were being stingy with the “go-shop” period, during which a publicly traded company is open to competing offers:

1997  TPG (then called Texas Pacific Group) acquires a majority of J. Crew for $390 million. The firm hires Mickey Drexler away from The Gap to revive the fortunes of a faded clothing brand. Drexler was given a 12 percent stake in the company – a relatively high equity award for a single executive.

2006 J. Crew goes public with a market capitalisation of $1.3 billion, essentially doubling the value of TPG’s stake. 
1 Sept, 2010 Drexler has dinner with TPG’s James Coulter and the two discuss the possibility of another J. Crew take-private together.

24 Nov, 2010 A string of institutional investors begin filing lawsuits against J. Crew. One is the City of Orlando Police Pension Fund, a public shareholder of J. Crew Group, which challenges the proposed sale of J. Crew in the Delaware Court of Chancery. Orlando alleged that J. Crew chairman and CEO Mickey Drexler “conspired with TPG representatives on the J. Crew board of directors. . . to improperly structure the Proposed Transaction to favor TPG, and dissuade other interested parties from bidding for the Company,” according to the law firm representing the pension system. 

Jan, 2011 J. Crew and its proposed buyers agree to settle with shareholders for $10 million. Among other concessions, the go-shop period is extended. However lawyers for the shareholders argue that the sale process is still not “truly open and fare.”

1 Feb, 2010 Shareholders walk away from the earlier settlement. In a letter to the Court of Chancery, lawyers for the plaintiff shareholders argued that the Drexler/TPG group had acted to “undermine the benefits of the settlement” by “signal[ing] to the world that they are investing all resources in closing the deal with TPG as soon as possible, and that nobody else should bother to bid for J. Crew.”

7 March, 2010 Acquisition of J Crew is completed after a shareholder vote.

1 Sept, 2011 J Crew and its new private equity owners deny allegations of wrongdoing but agree to pay shareholders $16 million to settle the lawsuit and also to restrict Drexler from voting his shares to approve the TPG deal.