NEW YORK — As an acquisition target, Badgley Mischka may be a jewel in the rough, but it is a jewel with some rough edges.
The designers Mark Badgley and James Mischka acknowledged in an interview on Tuesday that their business was never profitable and was unlikely to become so under its existing structure without a lucrative stable of licenses. And its history of financial losses has been a primary factor in scaring away potential investors, according to people who have been briefed on the company’s books.
Badgley Mischka’s decision to cancel its spring collection and cut 60 percent of its workforce on Monday happened because of the slower-than-expected pursuit of the 16-year-old eveningwear label, the designers said.
While he would not disclose the asking price, Mischka said they had turned away some early bidders because their offers were too low. Yet, any buyer would face the same challenge the designers did when they started the line in 1988, and that which Escada AG has struggled with since buying the company in 1992 — figuring out how to turn the prestige of the runway into a viable business.
“The real decision is how much is needed to invest in the company and how long it will take to get them to that platform where they are profitable and successful,” said Lawrence C. DeParis, president and chief operating officer of Escada (USA) Inc., which said last October it would divest its noncore brands as part of a global restructuring by the parent Escada AG.
DeParis said he was surprised that an appropriate offer had not yet materialized and that the decision was made to cancel the spring collection as a last resort.
“We were staring at the end of the barrel on the calendar,” he said. “Escada has been open to a deal structured in any reasonable way in order for them to move forward.”
DeParis would not specify whether Escada had set an opening threshold for its 80 percent stake in the brand or the identity of those interested parties.
Among the companies that are said to have explored a deal are Birger Christensen, the furrier that signed a license with Badgley Mischka last year through its BC International division; an Italian accessories firm that has worked with the designers on handbags and shoes; the Puig Beauty & Fashion Group, which owns Carolina Herrera, Paco Rabanne and Nina Ricci, as well as institutional funds and private equity companies.
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“Several people have come to us, and there are some we are still talking to that could lead to a deal,” Mischka said. “We only need one.”
Badgley Mischka has become synonymous with beaded evening gowns with a vaguely vintage feel, landing on the fashion map in 1996 when Winona Ryder wore such a dress encrusted in crystal and pearl beads to the Academy Awards at a time when the red carpet was ruled by Giorgio Armani. Just four years before, the designers had been trying to cope with indebtedness to fabric suppliers and mispronunciation when Ron Frasch, then the general merchandise manager of Neiman Marcus, made the introduction to Escada’s former president and chief executive, Peter Laniak.
DeParis, who worked in Escada’s financial operations, recalled that the company paid about $200,000 with the assumption of debt for Badgley Mischka.
The brand has since grown to annual retail volume of $40 million, but that is still considered smaller than the most desirable acquisition targets in the luxury sector. Conglomerates such as LVMH Moët Hennessy Louis Vuitton and Gucci Group continue to wrestle with the fallout of expensive acquisitions of the Nineties, suggesting a less traditional business model would be appropriate for the company.
Analysts have mentioned some independent American brands that have built a strong sportswear business under the umbrella of a high-end evening collection, such as Oscar de la Renta, Bill Blass or St. John, as more logical partners.
It might even be easier to strike a deal with the announcement that Badgley Mischka has cancelled its spring collection. Mischka confirmed that 60 percent of the company’s estimated 40 remaining employees were let go on Monday, and that the designers have not decided what to do with the 11th-floor showroom space at 525 Seventh Avenue in Manhattan. Potential suitors could attempt to acquire only the trademarks and pursue a strictly licensed operation, or meld the collection into their own operations.
“I can’t believe they’re not going to find a partner who respects their creative skills and their integrity,” said Frasch, now of Saks Fifth Avenue in an as-yet-untitled position, which along with Neiman Marcus are the designers’ largest retail clients. “Mark and James are immensely talented and also happen to be two of the finest human beings in our industry.”
Robert Burke, vice president and senior fashion director of Bergdorf Goodman, said the store has had a consistently good business with Badgley Mischka.
“They’re an important design force with a special point of view that has continued to evolve,” he said. “The reality is that they’re facing a difficult business moment and we’ll miss not having the collection for a season, but we have confidence they’ll come back.”
The designers’ said their biggest regret was not to have pursued an aggressive licensing campaign earlier in their careers. Before Escada ordered the divestiture of the brand, they had deals in the works for lingerie, eyewear, bridal and fragrance licenses, but have put those plans on hold pending the change in ownership.
“We’ve spent 16 years building Badgley Mischka as a brand,” Mischka said. “It’s got incredible potential for expanding beyond a niche couture eveningwear business. It has an image. It stands for glamour, luxury and fantasy, and those are dreams that are easy to sell to people.”