Will it work the second time around?
That is the question hanging over HMX Group and its related operations, which on Friday filed a voluntary Chapter 11 petition for bankruptcy court protection in Manhattan — the second time in four years the company has gone into bankruptcy. While a deal is in place that could keep factory jobs in the U.S., there’s no guarantee that plan will come to fruition and, if it doesn’t, the venerable men’s wear brand could once again find itself a political issue in a presidential election race centered around the economy and American jobs. Both President Obama and challenger Mitt Romney are known to wear the firm’s brands.
According to the Chapter 11 petition, the company listed assets of up to $50,000 and liabilities of between $50 million and $100 million.
The company’s Canadian affiliates are not part of the bankruptcy filing.
HMX — which owns as its core brands Hickey Freeman and Hart Schaffner Marx — also has up to a $65 million debtor-in-possession credit facility with Salus Capital Partners, its pre-petition lender.
As part of the bankruptcy filing, HMX signed an agreement to sell the company to Authentic Brands Group, with the firm’s U.S. factories, showrooms and other assets of the operating component to be sold to a new entity, or Opco, that will be owned and managed by existing management. As the licensee, Opco will be required to pay a royalty to Authentic Brands.
The agreement, with Authentic Brands as the “stalking horse,” is subject to better offers in a bankruptcy court auction.
HMX faces significant hurdles even under the plan unveiled Friday.
Authentic Brands, with the backing of Leonard Green & Partners, is seeking to buy the company’s brands. But it is not funding the operating division, although it will keep production at the loss-making plants. That means HMX chief executive officer Doug Williams will need to find an investor who can help him buy and fund the operating division. Some financial experts believe that could be a tall order, given that it typically is hard to get financing for a new entity, Opco, that doesn’t have a proven track record in terms of profitability.
According to James “Jamie” Salter, chairman, president and ceo of Authentic Brands, his firm plans to use its marketing expertise to help the company reach a younger customer. Other key points to his strategy include divesting the Canadian factory, acquiring other brands that are synergistic and will help keep the American factories full, and taking the labels international.
“We’re not changing the model,” Salter told WWD. “Doug and his management team will be the licensee. Doug will keep the two factories in America and another strategic partner will take the Canadian factory.” He said he’s currently negotiating with two companies, both of which currently operate their own production facilities. He declined to identify the two prospective buyers.
Salter said Williams has already lined up the financing to create an operating company. “But he’d like to have better financing so he’s shopping the deal he has,” Salter said.
Williams declined to comment about the specifics of the Authentic Brands deal.
Salter said one of the key selling points for Authentic Brands’ bid is that “we like that it’s American-made. We think there’s a play there. The brands are really good, we just need to put some life back into them.”
He said Hickey Freeman and Hart Schaffner Marx appeal primarily to men over 35. “But we’re really good at social media and the celebrity end and we will focus on making them more hipster. The styling is great, we just have to bring them to life.”
Authentic Brands’ most recent deal was in June when it acquired the IP assets of Sportcraft Ltd., through which it said it planned to reenergize the recreational sports industry. The company, which seems to favor the action sports and entertainment and celebrity licensing sphere, owns the intellectual property assets of Marilyn Monroe, Silverstar and Tapout.
Salter also believes there’s an opportunity to bolster the brands’ sportswear offering. “If we can get the mix better, we believe we can grow this company.”
Williams emphasized that there’s interest in keeping HMX’s operations intact because speed-to-market issues, higher labor costs overseas and shipping costs worldwide give the firm a competitive advantage by manufacturing Stateside. “American manufacturing is more competitive today than it has been in a long time,” he noted.
Williams also disclosed that Opco won’t be going forward with the special markets group, which produces the Pierre Cardin and Austin Reed labels. While the business is substantial, it’s not profitable, the ceo said.
But the overriding question remains: What’s going to happen to the factories? “That’s the million-dollar question,” one source said.
“There’s no question mark about the factories,” said Williams. “There’s no question in my mind that the company moving forward will operate factories.…We believe in our people and our factories.”
He said he plans to visit the factories in person this week to update them on the situation.
WWD also has learned that Authentic Brands’ bid might not have been the highest offer received by the company, although it was the one that supposedly allowed for the continuation of the operating division. And that’s where the components of the bids got interesting, sources said. As reported, all potential bidders, including Authentic Brands, were interested in the IP assets of HMX.
It is believed that Authentic Brands’ bid included just the valuation of the IP assets, and not other HMX assets, since those are considered part of the going-forward operations. The other bids were said to have included valuations for the IP assets, and for other assets not needed when there is no going-forward operation, such as HMX’s real estate, inventory and accounts receivables. That might mean that the sum of those parts equaled to a higher bid than the one Authentic Brands put on the table.
Politically, it made sense for HMX to choose Authentic Brands since it gives management a fighting chance to try to keep factory jobs in the U.S.
There’s a question of whether Authentic Brands as licensor could terminate the licensing arrangement and at some point move jobs overseas. According to Williams, that’s not possible.
“The license agreement provides for a long-term license,” he said, adding that there’s no provision in the contract where Authentic Brands has the option to end the license early.
Noel Beasley, president of the union Workers United, said he is aware of the Authentic Brands bid, but not with the specific details such as how the operating company will be funded.
“That will be disclosed [in the bankruptcy] and reviewed by the court,” he said.
There are union contracts at each of the three factory locations. “We would certainly anticipate that anyone buying the company would assume the contract,” Beasley said.
The union president also said there could be a renegotiation of the union contract, and that the union is prepared to negotiate if needed. But would obligations under the old contracts, such as pension benefits and health care, go by the wayside?
Not necessarily, Beasley said, adding, “We would bargain on behalf of our members. We’ve been down this road a lot of the time with [garment manufacturing]. We’re not particularly worried. We’re looking for buyers with deep pockets who can fund the operation.”
And if it looks as if there might not be solid funding in place for a new HMX operating company?
“That’s when we start the boycott process. We’ll do whatever we need to do,” Beasley said.
The union already had revealed a plan to step up political pressure over the factories, and had reached out to Ron Burkle’s Yucaipa Cos. about bidding for HMX.
Both Williams and the union president said they’ve had the requisite support from lawmakers. They include lawmakers on Capitol Hill — Sen. Charles Schumer (D., N.Y.), Rep. Louise Slaughter (D., N.Y.) and Rep. Jan Schakowsky (D., Ill.) — and local politicians Illinois Gov. Patrick Quinn and Mayor Martin Moylan of Des Plaines, Ill., where the shuttered Seaford Clothing Co. plant was located.
For the immediate future, it’s business as usual.
The DIP facility will “allow HMX to flow fabrics to finished goods and ship the orders on time to the retailers,” Williams said.
“We are pleased to provide a DIP facility to HMX Group that provides the company with the liquidity, time and a runway to effectuate a transaction that seeks to maximize value for all of the company’s constituencies — its employees, management, shareholders, vendors and the estate,” said Andrew H. Moser, president of Salus Capital.
HMX’s predecessor, Hartmarx Corp., filed for bankruptcy court protection in 2009 in Chicago, and the operating division was acquired out of bankruptcy by Mumbai-based firm S. Kumars Nationwide Ltd., which holds a 90 percent stake in the renamed HMX Group. London-based investment firm Emerisque Brands owns a minority interest.
Meanwhile, HMX bankruptcy counsel will be in front of Manhattan Bankruptcy Court Judge Allan L. Gropper today to finalize first-day orders and obtain permission to continue with day-to-day operations.