Crafts and fabrics retailer Jo-Ann Stores (NYSE:JAS) has agreed to accept an unsolicited offer from private equity firm Leonard Green & Partners LP to purchase the company for $1.6 billion. The deal was unanimously agreed to by Jo-Ann Stores' board. This deal follows Green & Partners' involvement in the recent buyout of J Crew Group (NYSE:JCG).

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The Deal
Jo-Ann Stores competes with privately held Michaels, AC Moore Arts & Crafts (Nasdaq:ACMR) and local niche craft stores. The buyout offer translates to $61 per share, a 34% premium.This puts the company's value at more than 17 times forward earnings. Jo-Ann Stores has until February 14 to find another buyer, but would have to pay a $20 million termination fee in that event. Jo-Ann Stores hadn't been seeking a buyout and recently experienced a strong upturn in its business as the recession showed signs of ending.

Jo-Ann Stores
Jo-Ann Stores does just over $2 billion in sales, and has net income of nearly $90 million, or $3.32 per share. The company has virtually no debt. Analyst estimates for fiscal 2011 average $3.47 EPS and $3.88 for fiscal 2012. While some observers consider Jo-Ann Stores' forecasts relatively weak for full-year profits, I disagree, and also think this shouldn't be confused with its long-term prospects, especially given the slow economy. The buyout also confirms the long-term value potential of Jo-Ann Stores. The deal with its premium looks to be priced at full value. Green & Partners' takeover will allow the retailer to continue its expansion and upgrade plans.

Retail Confidence
Leonard Green & Partners has $9 billion under management, and holds stakes in such companies as Whole Foods Markets (Nasdaq:WFMI). It participated with the TPG Group in the buyout of J Crew Group last month for $2.86 billion. In October, Gymboree was taken private by Bain Capital in a deal for $1.8 billion as part of the growing private equity activity heating up for deals in retail.

The activity on the retail merger front has rumors of other companies being sought after in potential buyouts. Aeropostale (NYSE:ARO) was offered up as a possible candidate, along with Build-A-Bear (NYSE:BBW). The return of private equity to deal making may signal the real end of the recession. The companies being acquired or those that rumored to be sought after are regarded as stable, solid businesses, just like Jo-Ann Stores. The other important factor at work is that retail has been making a strong comeback and should continue to do so, thus making these deals more attractive. Whether deal-making activity in retail will extend to public company interest in pursuing takeovers is unclear.

The Bottom Line
I've liked the long-term prospects of Jo-Ann Stores for some time. If you're a shareholder, you should make out well on the takeover deal. Sometimes finding good companies, buying them and holding onto them has an extra reward, as the buyout does in this case. (For related information, take a look at 3 Reasons To Avoid Private Equity IPOs.)

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Tickers in this Article: JAS, JCG, ACMR, WFMI, BBW, ARO

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