VF Smarter Than Buffett as Shares Surge on Timberland: Real M&A

The most expensive acquisition for a U.S. footwear company since 2004 is also proving to be one of the smartest deals in America this year.

VF Corp. (VFC), the world’s largest apparel maker, surged 10 percent after agreeing to buy Timberland Co. (TBL) for 12.3 times earnings. While the valuation for the $1.97 billion offer is 18 percent higher than the median U.S. footwear deal, VF’s jump yesterday was the biggest by any U.S. acquirer following an all- cash takeover for a publicly traded target in 2011, according to data compiled by Bloomberg. The largest cash offer, Warren Buffett’s $9 billion purchase of Lubrizol Corp., caused Berkshire Hathaway Inc. to fall 1.3 percent.

Chief Executive Officer Eric Wiseman, who has returned more than twice as much to VF investors than his biggest rivals since becoming CEO in 2008, is now attempting the company’s largest acquisition. While Timberland fell by the most since 1987 last month after earnings slumped, investors are betting VF can boost margins that are half the industry average and profit from sales that may climb to a record this year. The deal has already rewarded owners of Greensboro, North Carolina-based VF with a $1 billion gain, about half the value of the takeover itself.

“It’s hard not to like this deal,” said Brian Sozzi, a retail analyst at Wall Street Strategies in New York. “They got Timberland at a really good price because they bought it on that horrible earnings report. They’re getting a company that’s cut expenses dramatically over the past two years, and has real growth drivers within the brand portfolio, so sign me up.”

Acquisition Detail

“It makes compelling strategic sense and compelling economic sense,” Wiseman said in a telephone interview yesterday. “The investment community has high confidence that we can do what we say we’re going to do.”

Timberland CEO Jeffrey Swartz said he was “proud of the result” for his own shareholders, who recouped their losses since the company’s last earnings announcement.

“Our board was very rigorous and sought real counsel and wisdom and insight in understanding whether the offer was fair and reasonable from a shareholder view,” he said.

VF, which makes North Face jackets, Vans sneakers and Wrangler jeans, will pay shareholders of Stratham, New Hampshire-based Timberland $43 a share, the companies said in a statement yesterday. Including net cash, the $1.97 billion deal is valued at 12.3 times earnings of $160 million before interest, taxes, depreciation and amortization in the past 12 months, data compiled by Bloomberg show.

Relative Value

That would be the most expensive U.S. footwear deal since VF bought Vans Inc. for 72 times, the data show. The median industry acquisition was struck at 10.4 times.

VF rose 10 percent to $101.01 yesterday. The average first- day gain for U.S. acquirers after announcing cash takeovers over $1 billion this year had been 0.4 percent, the data show. After Buffett announced his purchase of Wickliffe, Ohio-based Lubrizol on March 14, Omaha, Nebraska-based Berkshire Hathaway declined 1.3 percent. That cost Berkshire owners about $2.65 billion.

The Timberland deal is already starting to pay for itself. The announcement added $1 billion to VF’s equity value, lowering the cost of the takeover for shareholders by about half. That’s the highest proportion of any comparable deal after the first day, data compiled by Bloomberg show.

“If you can provide a clear value, there is pricing power to be had, and there is value to be found, and so you can pay up a little bit for that,” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. “You can make a good argument that it’s potentially worth the premium multiple.”

Photographer: Thomas Lee/Bloomberg

Timberland CEO Jeffrey Swartz. Close

Timberland CEO Jeffrey Swartz.

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Photographer: Thomas Lee/Bloomberg

Timberland CEO Jeffrey Swartz.

Comparative Returns

Before yesterday’s agreement, Wiseman returned 50 percent to VF shareholders, versus an average 22 percent for consumer discretionary stocks in the Standard & Poor’s 500 Index.

Wiseman announced VF’s biggest takeover in its 112-year history after its cash balance climbed to a record $792 million last year, data compiled by Bloomberg show.

“VF’s shareholders are better off owning the brand than owning cash,” Polley said. “Timberland should arguably be one of the strongest brands in that space.”

VF plans to use $500 million of that money for the purchase and borrow $700 million in short-term commercial paper, which it expects to pay off by year-end, Wiseman said. The company will also take out $800 million in longer-term debt, he said. VF generated $649.1 million in free cash flow in the last 12 months, data compiled by Bloomberg show.

Capital Structure

“They’re going to pay off a chunk of that debt pretty quickly,” said Christopher Svezia, an analyst at Susquehanna International Group LLP in New York.

By acquiring hiking-boot maker Timberland, VF will increase sales at its outdoor and sports gear unit to more than half of the company’s total revenue, which was $7.7 billion last year.

Wiseman said the division is already the “biggest, fastest growing and most profitable” part of VF and earned about 20 cents before interest and taxes for each dollar of sales last year, according to data compiled by Bloomberg.

The company aims to boost Timberland’s operating margin to 15 percent in the five years, Wiseman said. Its 9.3 percent margin was lowest among U.S. footwear companies over $1 billion, the data show. VF had an overall margin of 13.6 percent.

VF is also buying a company that is projected to have record sales this year and next, according to analysts’ estimates compiled by Bloomberg. Timberland, which tumbled 26 percent on May 5 after missing analysts’ earnings estimates, is among the cheapest relative to revenue.

“People are looking for deals that make logical sense. In some cases they don’t have a problem for a premium paid for that if it makes logical sense,” said Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $3.6 billion. “The market likes it.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Danielle Kucera in New York at dkucera6@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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