By  on October 18, 2007

The heat on Kellwood Co. is expected to intensify.

Following the $1.96 billion company's rejection Wednesday of a $543 million bid by Sun Capital Securities Group LLC, analysts and consultants said the firm now has to prove to shareholders that it can turn around its operations and boost its lagging share price — and do it fast.

The St. Louis-based company said in a statement Wednesday that Sun Capital's $21 a share bid "significantly undervalues the strength of Kellwood's expanded portfolio of brands and the company's opportunities for sales and earnings growth," according to a statement issued Wednesday morning. Further, the bid "is not in the best long-term interests of Kellwood and its shareholders...taking into account the potential benefits that may be realized through the company's previously announced long-term strategic plan."

Kellwood is in the first year of its five-year strategic plan, and industry sources predict it will take the group at least two years to organically raise its stock price anywhere close to the $21 offer. Kellwood's shares closed Wednesday down 34 cents to $17.33.

"Our board is committed to enhancing shareholder value, and the Sun Capital proposal is not consistent with this objective," Robert C. Skinner Jr., chairman, president and chief executive officer of Kellwood, said in a statement. "We continue to believe that executing our corporate strategy to reinvigorate our core business, expand our penetration into higher profile, better and above price point brands, connect more directly with consumers and utilize our operating infrastructure more efficiently to fund our growth will deliver greater value to our shareholders. Our board is determined to enable all of its shareholders to participate in these future benefits resulting from the company's sales and earnings growth strategy."

Skinner was unavailable Wednesday for further comment, and officials at Sun Capital declined comment.

"Kellwood doesn't have any alternative but to pursue its stated course," said consultant Paul Charron, former chairman and ceo of Kellwood rival Liz Claiborne Inc. "The next move, if there is one, is someone else's.

"I would have been flabbergasted if the board took that offer," Charron continued. "It was a low-ball bid at a point in time when the stock was depressed. The stock picked up a few dollars and is now tracking in a range with the other companies in the category."With behind-the-scenes negotiations with Sun Capital likely to follow, Kellwood must now attempt to deliver shareholder value on its own.

"This is an issue between the stockholders, who could have gotten a substantial premium over the stock price instead of waiting several years, versus the management, who believes their plan could make it better," said consultant Emanuel Weintraub. "Sun Capital was offering $21 when the stock price was $15 — that's a 40 percent premium — and now it's [around] $18 for reasons probably solely attributable to the bid. If I were a stockholder, I would say sell the stock, take the money and run."

Sun Capital's offer was actually closer to $1 billion because it included the assumption of $500 million in debt.

Sources predict Wednesday's refusal might be just round two in a long fight. Sun was willing to buy all remaining stock at $21 and, as the second largest holder with about a 10 percent stake at the time of the bid, the equity firm now is likely to buy shares at the $17 going rate until it maxes out at a 15 percent stake. Sun could also team up with other shareholders to force a sale, demand a seat on the board, try to unseat the management or make them more seriously consider selling — possibly even at a lower price, sources suggest.

With the exception of brands like Vince, Gerber, Hanna Andersson, Baby Phat, Smart Shirts and American Recreation, Kellwood's portfolio lacks many lifestyle brands, retail, international or luxury businesses, and instead is filled with struggling moderate labels like Sag Harbor, Koret and Briggs New York, plus licensed brands like O Oscar and Calvin Klein white label.

Those two licensed brands could be adding to the pressure at Kellwood, since sources said both require huge royalties payable to Calvin Klein and Oscar de la Renta, as well as guarantees to retailers like Macy's. While both are strong labels, neither is generating the level of sales to justify the guarantees or royalties, sources said.

Kellwood's strategic plan calls for acquiring better and above price point brands with retail and international reach, and the firm has spent the last year making small acquisitions in higher margin markets. It entered contemporary last year, buying Vince in September and Hollywould in December. Then in June, it bought activewear firm Royal Robbins Inc. for about $40 million, and children's line Hanna Andersson Corp. for about $175 million.Although analysts see Kellwood's new acquisitions as ripe with growth potential, the four don't have much in common, and the integration could prove challenging. In addition, they make up only a small portion of what has proved a challenging portfolio — and Kellwood's track record with acquisitions has been problematic, with many analysts believing the firm overpaid for brands such as Phat Farm. Analysts suggest Kellwood's problems would be easier to fix as a private company, shielded from public scrutiny.

For fiscal year 2006, earnings swung into the black to $31.4 million, or $1.21 a diluted share, from a loss of $38.4 million, or $1.42, in 2005. Restructuring costs largely caused that dramatic drop from earnings of $70.1 million, or $2.50 a diluted share, in 2004, and $71.1 million, or $2.62, in 2003. For the last two years, sales have been around $1.96 billion, down from $2.56 billion in 2004 and $2.35 billion in 2003.

Faced with a disappointing $66.3 million second-quarter loss from continuing operations last month, Kellwood streamlined its women's sportswear business by dividing it into Lifestyle Alliance for moderate brands, including Sag Harbor, Koret and Briggs New York; Designer Alliance for most of Kellwood's better and above price point brands, including Calvin Klein women's better sportswear, ck Calvin Klein women's bridge sportswear, O Oscar, David Meister and Hollywould, and Modern Alliance for junior and contemporary lines, including XOXO, My Michelle and Vince.

In the last month, the firm has also made a series of management changes, installing new leadership whom industry sources hope will prove more effective at executing the company's strategic plan. Among the recent moves:

l On Tuesday it named Sandra Campos, president and co-founder of designer packaging company Mobi Inc., as president of O Oscar, succeeding Maria Viccaro, who resigned last week.

l Last week Hope Brick, vice president of apparel, accessories and footwear design at Wal-Mart Stores Inc., was hired as chief merchandising officer of the new Lifestyle Alliance division.

l In September Kellwood named Wendy Chivian, senior vice president and general manager of Badgley Mischka sportswear, as president of Kellwood's Calvin Klein women's sportswear, succeeding Stephen L. Ruzow as the head of its licenses for Calvin Klein women's better sportswear and ck Calvin Klein women's bridge sportswear businesses.l Coinciding with the restructuring announcement, the company named Patrick J. Burns, vice president of marketing and strategy since October and former head of the Gerber Childrenswear division, as Lifestyle Alliance group president, effectively replacing Paul A. Robb, ceo of Kellwood's Lifestyle Design Group, which included O Oscar and Sag Harbor, who was let go.

"Kellwood's management rejecting this is promising stockholders greater rewards in the future than Sun is offering right now, but will the shareholders agree that the strategic plan will bring them the rewards in one to two years or is it more long-term? How good is the strategic plan? No one knows until you execute it, and Kellwood has not shown a great ability to execute successfully in all of its divisions," Weintraub added. "If you are asking me as a professional management consultant what Kellwood should do next, I think Kellwood should continue to negotiate for the best deal possible for the stockholders."

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