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Selling Warnaco: Not So Easy

NEW YORK -- Every division at bankrupt Warnaco may be up for sale, but -- to the dismay of creditors -- licensing conflicts may be limiting any prospects.<P>The limitations on asset sales also could leave Warnaco president and chief executive...

NEW YORK — Every division at bankrupt Warnaco may be up for sale, but — to the dismay of creditors — licensing conflicts may be limiting any prospects.

The limitations on asset sales also could leave Warnaco president and chief executive officer Antonio Alvarez with less cash in his own pockets. His employment agreement ties bonus payments to the so-called enterprise value realized by the company.

According to bankruptcy court records, Warnaco’s liabilities are $2.5 billion. Sources said that the company, whose annual volume is more than $2 billion, has spent the better part of its year in bankruptcy cleaning up its distribution and inventory problems. In addition, Warnaco has been looking at the sale of its different assets — separate investment “books” have been prepared for such divisions as CK Jeans, CK Underwear, their intimate apparel division and Authentic Fitness.

But a debt analyst said that rumblings that the sale offers were “not going well” began circling in April. It was the same time that issues involving Warnaco’s licensing partners also surfaced.

Sources said that while Calvin Klein Inc. has been in touch with investment bankers, CKI would only want the CK Jeans and CK Underwear businesses if it could get both. Warnaco, which owns the underwear business, holds the jeans license until 2044.

Another potential asset sale that’s been the subject of marketplace chatter is Authentic Fitness, which Warnaco is seeking to sell at a price “north of $250 million,” according to a financial executive. But another source said any Authentic sale faces a major stumbling block: Warnaco’s often-difficult relationship with London-based Pentland Group, which owns the worldwide rights to the Speedo trademarks. Authentic license gives it the rights to the Speedo brand in North America in perpetuity. However, according to a former Authentic executive, “every single decision, product, marketing campaign and the like” must first be presented to and approved by Pentland before Warnaco can proceed.

Documents filed with the Securities and Exchange Commission state that Authentic was formed in 1990 for the purpose of acquiring Warnaco’s then Activewear division. Prior to going public in July 1992, Authentic was owned by Pentland, GE Capital Corp. and Linda Wachner, Warnaco’s former ceo, who has remained on the Warnaco board since Warnaco filed for bankruptcy in Manhattan in June 2001. In mid-1996, Wachner ended up with egg on her face when she issued a joint release from Warnaco and Authentic stating that the two companies had agreed to merge. Five weeks after the release, on July 15, Pentland announced that it would not vote for the merger, supposedly because it didn’t like the terms in Wachner’s release: 0.725 shares of Warnaco for every share of Authentic tendered. In addition, R. Stephen Rubin, Pentland’s then-chairman, resigned from the Authentic board. Warnaco did eventually acquire Authentic in December 1999, but the debt levels from the acquisition pushed Warnaco into troubled territory and contributed to its subsequent bankruptcy filing.

Sources said last week that the manufacturer’s ongoing fights with Pentland caused some potential acquirers to have second thoughts about Speedo and Authentic in general. But another source familiar with the company’s operations said that Wachner’s presence on the board does not affect management’s ability to run the company or effect sales of assets. “There is a subcommittee on the board that is dealing with the restructuring issues,” he said.

Still, what really are potential buyers purchasing?

Lynne Koplin, president and ceo of Apparel Ventures Inc., observed: “When you are buying a business that is made up of licenses, what are you really buying? What do you have after the licensing contract expires?”

The former Authentic executive noted that Wachner, as a rule, “negotiated fairly long-term” licensing deals, but that a licensee change — depending on how the agreement was written — could force renegotiations with the licensor over its terms.

Koplin also speculated that Warnaco is looking to sell Authentic in its entirety, not via sales of its different licenses, which include Anne Cole, Catalina and other brands. “The problem is that Warnaco needs to find a buyer who understands both manufacturing and retail, someone who understands all aspects of the business as well as Authentic’s competitors,” she noted.

Swimwear designer Anne Cole said that she was aware of a few groups looking at the different Authentic divisions, but said that the company was, for the most part, in a restructuring mode. Cole’s product lines are manufactured by Authentic through a worldwide license. The designer added that while the long-term outlook for the industry is positive, the short-term has been affected by the drop in vacation travel by consumers since the terrorist attacks of Sept. 11. In addition, the caution of retailers hoping to keep inventory levels clean has affected orders.

The stumbling blocks caused by the licensing issues — control, production, volume, distribution channels and royalty payments — also affect separate negotiations involving CK jeanswear. Those issues, to be sure, also curtail the size of any bonus payments that potentially would be paid to Alvarez.

Bankruptcy court documents indicate that Alvarez has an employment agreement befitting a turnaround expert. The ceo has a monthly base salary of $175,000 — or $2.1 milllion a year, plus incentive compensation and other potential payouts.

However, even those amounts have been decreased, reflecting in part the weakened economy and its effect on the retail and apparel industries.

Legal papers filed earlier this year show that Alvarez qualifies for incentive bonuses when the agreed-upon value of any asset sales — either singly or in aggregate — reaches $625 million, instead of the original $1 billion. Subject to adjustments, the maximum incentive bonus payable to Alvarez was cut earlier this year to $10 million from $38 million.

The overall effect of the revised agreement, court papers said, is that Alvarez can earn an incremental bonus “in addition to the $2.25 million minimum bonus, at different levels of enterprise value realized by the company in a sale, reorganization or combination of the two.”

Under bankruptcy rules, assets of the company are supposed to be maximized in a way that brings the highest return to a bankrupt firm’s creditors. Sometimes, a partial sale can be completed, and other times, the entire company is sold. A third possibility is when the bankrupt firm exits bankruptcy proceedings as a stand-alone company, an event that occurs usually because there’s no entity out there willing to buy assets at the price points demanded by creditors.

In the case of Warnaco, one fashion apparel executive said, Alvarez’s contract pays him more when Warnaco assets are sold.

Financial sources who have analyzed Warnaco’s situation said last week that the question of which scenario brings Warnaco creditors more cash — the sale of the whole or the sum of its parts — is moving closer to becoming a dead issue. Sara Lee, VF Corp. and Maidenform have all looked at Warnaco’s intimate lines, but high-ranking apparel executives said that each fears a bid would require shaking off major antitrust hurdles because of their existing market shares in the innerwear segment.

The road to a sale of Warnaco as a whole is also limited, in part, by current economic and market factors — the pool of available buyers for such a weighty purchase isn’t a significant one. Kellwood Corp.’s name has come up as a potential buyer — it has a thriving intimates division and does sportswear — but it doesn’t have the financial wherewithal to do a deal right now, sources said.

Warren Buffett’s Berkshire Hathaway’s recent acquisition of Fruit of the Loom raised speculation among some in the financial community that he might make a run at Warnaco. But Buffett’s investment strategy exhibits a preference for buying solid branded firms with strong management teams at distressed prices. Warnaco’s creditors have consistently sought top dollar, financial sources said.

Warnaco creditors — the major ones are members of its bank lending group — had at least one viable proposal to sell Warnaco before its Chapter 11 filing from Bain Capital, a Boston-based private investment group. Those lenders are led by Citibank and include Bank of Nova Scotia, Morgan Guaranty Trust, Societe Generale and Commerzbank AG. Financial sources said back then that Bain offered a deal that would have avoided a bankruptcy filing. However, the lending group didn’t want to accept a steep discount on their loans — in the range of 50 cents on the dollar — in exchange for equity shares in the company.

Another bid by VF prior to the Chapter 11 filing came in even lower, with Warnaco debt pegged at between 25 and 30 cents on the dollar. At that stage, sources said, creditors were not in the mood for a fire sale of Warnaco’s assets. But it is understood the Warnaco board never considered the VF offer.

Creditors might be wishing now they had accepted the Bain offer and avoided the bankruptcy filing. Vulture fund managers said current economic conditions make negotiating acquisition deals difficult, particularly when Warnaco creditors seem intent on maintaining their high-valuation posture. Creditors are “very disappointed people because it doesn’t appear that they’ll be getting any cash from asset sales,” a source said.”