PVH Unifies Calvin Klein With $2.9 Billion Warnaco Deal
PVH Corp., (PVH) the owner of the Tommy Hilfiger brand, agreed to buy Warnaco Group Inc. (WRC) in a $2.9 billion transaction, bringing all Calvin Klein-branded apparel under one roof in the largest clothing-industry deal announced in 2012.
PVH will pay $51.75 in cash and 0.1822 of a PVH share for each Warnaco share, the New York-based companies said in a statement today. The offer is worth $68.43 per Warnaco share, 34 percent higher than the last closing price of $50.88. Warnaco had licensed Calvin Klein’s jeans from PVH, which bought Calvin Klein’s company from the designer in 2003.
PVH Chief Executive Officer Emanuel Chirico said last year that he would “aggressively” seek deals to turn the company into the world’s largest apparel business, while boosting international sales and profit margins that trail competitors such as VF Corp. (VFC) and Ralph Lauren Corp. (RL) More than half of Warnaco’s 2011 sales came from outside the U.S.
“PVH is in a position now to consolidate the entire Calvin Klein brand and get it going in a common direction,” Armando Branchini, founder of Milan-based consultancy Intercorporate, said in an interview. “You get strategic brand management, and the opportunity to get more negotiating power with retailers.”
PVH surged 20 percent to $109.99 at the close in New York, its highest price since at least 1980. Warnaco jumped 39 percent to $70.58 for the biggest one-day gain since at least 2003. The shares have risen 56 percent and 41 percent respectively this year.
PVH, which traces its roots to a shoe company founded in 1876, is paying 11.6 times trailing 12-month earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. That’s more than the 7.7 times median for apparel industry deals over the past five years, the data show. PVH paid $3.1 billion, or 15.6 times Ebitda, for Tommy Hilfilger in 2010, the second-biggest U.S. apparel takeover in history.
The takeover premium represents “quite a high price,” though is “not unrealistic,” Branchini said.
PVH said the purchase will add 35 cents a share, excluding integration and transaction costs, to its earnings in fiscal 2013 if the deal closes as expected in early 2013. PVH expects the takeover to contribute $100 million in additional annual revenue, or so-called synergies, offset by $175 million in acquisition costs, which will be spread over three years. The combined companies will have $8 billion in sales.
“We believe this is a very complementary acquisition for us,” Chirico, who has been CEO since 2006, said on a conference call with analysts and investors today. The transaction combines Warnaco’s presence in fast-growing emerging markets, particularly in Asia and Latin America, with PVH’s North American and European operations. One goal is to expand Calvin Klein sales in Europe by using its PVH operating platform there, he said.
When the deal closes, Warnaco shareholders will own about 10 percent of the common stock of PVH. Warnaco’s board has unanimously approved the deal, and Helen McCluskey, Warnaco’s CEO since February, will probably join PVH’s board. Warnaco began as a maker of corsets more than a century ago.
“Manny Chirico is a great business builder,” Lauren Taylor Wolfe, a managing director of Blue Harbour Group in Greenwich, Connecticut, said in an e-mail. “This is smart for both companies and very positive for their shareholders.”
Blue Harbour, which has $1.2 billion under management, owns about 3 percent of Warnaco and previously was a shareholder in PVH.
PVH is buying Warnaco now after weighing such a deal for eight to 10 years because its Tommy Hilfiger acquisition gave it the confidence to run a global company and it has reduced debt from that transaction, Chirico said in a joint phone interview with McCluskey.
“This was an acquisition that clearly made the most sense,” he said. “It was the one we understood most. What we don’t have to deal with is to understand the brand.”
Warnaco felt it could grow faster in combination with PVH than under its own steam or its own acquisitions, McCluskey said in the interview.
“It makes sense to have the brand aligned for marketing and advertising purposes,” Ashma Kunde, an apparel analyst with Euromonitor in London, said in a phone interview today. “In the more developed markets of U.S. and Europe, super-premium jeans and underwear are some of best performing categories, so acquiring Calvin Klein jeans and underwear is a major advantage.”
Prior to acquiring Tommy Hilfiger, the U.S. accounted for almost 90 percent of PVH’s revenue, Bloomberg data show.
Bronx, New York-native Calvin Klein, 69, founded his company as a Manhattan hotel coat shop in 1968 and built the brand into one of the world’s best-known labels. He is credited with creating the designer jean trend, helped by a young Brooke Shields, who said in an ad campaign that nothing would come between her and her Calvins. The brand drives $7.6 billion in total revenue, according to PVH. Warnaco obtained rights to the Calvin Klein brand in the 1990s.
Peter J. Solomon Co. served as lead financial adviser to PVH for the transaction and financing. Barclays, BofA Merrill Lynch and Citigroup Global Markets Inc. have committed $4.33 billion in financing, while also acting as financial advisers to PVH, according to the statement. Wachtell, Lipton, Rosen & Katz provided legal advice to PVH. JPMorgan Chase & Co. is financial adviser to Warnaco, and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal adviser.