Caution Against Chasing Abercrombie Stock On Takeout Rumors

The Wall Street Journal reported earlier this week private-equity firm Cerberus Capital Management is believed to be teaming up with American Eagle Outfitters (NYSE: AEO) to acquire rival teen retailer Abercrombie & Fitch Co. (NYSE: ANF).

The WSJ report shouldn't come as a surprise; talks of M&A activity have been floating around for some time. Meanwhile, the Street isn't entirely convinced a deal would occur.

Baird: Don't Chase The Stock

Mark Altschwager of Baird commented in a research report that Abercrombie's stock has already gained 17 percent in the past month on M&A chatter. The analyst added that while a potential deal could generate synergies, it won't be sufficient to "ease sector pressures," including too many stores, little differentiation and need for continued investments to meet the evolving consumer preference.

Altschwager further noted high leverage has "not been kind" to many retailers, as it presents less flexibility to invest and less ability to withstand traffic pressure. This implies any takeout premium would be lower and less attractive for shareholders.

Bottom line, the analyst isn't dismissing the concept of a deal but should a deal occur it is unlikely to occur at a "meaningful" premium to current valuation levels.

Shares of Abercrombie are Neutral rated with an unchanged $15 price target.

At time of publication, shares of Abercrombie were down 5.48 percent at $13.29.

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