By  on March 10, 2010

NEW YORK — J.P. Morgan Equity Research has outlined a scenario for what a potential Phillips-Van Heusen Corp. acquisition of Tommy Hilfiger would mean from a strategic perspective.

As first reported in WWD, sources have indicated PVH, the $2.4 billion apparel firm, is in talks with Hilfiger about a possible acquisition. Hilfiger has been owned by private equity firm Apax Partners for nearly four years.

“Theoretically it can be highly accretive depending on how it’s structured,” Christoper Kim, vice president, J.P. Morgan Equity Research, told WWD. “The opportunities to have revenue synergies are relatively compelling.” He said since Hilfiger has a very strong business in Europe, it would give PVH opportunities to distribute some of its brands in Europe, as well as Asia. He also feels if Apax takes 20 percent of PVH stock, “it would give them the ability to slowly liquidate that holding, rather than being locked in with equity.”

In his research note, released Tuesday, Kim wrote,“PVH has a strong track record for successful acquisitions (Calvin Klein, Superba), and we believe that management will not only be focused on long-term synergies and accretion, but also accretion in year one.

“At nine times publicly available EBITDA (earnings before interest, taxes, depreciation and amortization) figures in our scenario analysis, we would expect Tommy to be 30 cents accretive to EPS (earnings per share) in year one, and $250 million in annual debt pay down could translate to 20 cents in annual EPS contribution alone,” wrote Kim.

According to Kim, valuation poses a concern, “but Tommy has very strong free cash flows.”

Media reports have speculated Hilfiger’s business has a valuation of between $3 billion and $4 billion. Kim called the low end of the range translating to an 8 times EBITDA multiple, “reasonable, in our view,” and the higher figure, at 10.5times EBITDA “somewhat steep in our view.”

“Our scenario analysis assumes a 9 times multiple of a $3.4 billion valuation (enterprise value). Our scenario model assumes that 20 percent of this is financed via stock (to Apax) with the remainder via debt at an 8.5 percent interest rate,” wrote Kim.

For the year ended March 31, 2009, Hilfiger generated $378 million in EBITDA on sales of $2.2 billion. Kim pointed out this data includes a 19.9 percent EBITDA margin. “Needless to say, Tommy generates among the best cash flows among apparel manufacturers (vs. its peer group at 13.2 percent EBITDA for 2009),” wrote Kim.

In a telephone interview, Kim said this deal differs from PVH’s acquisition from Calvin Klein which was “more of a licensing model.” He said acquiring Hilfiger would give PVH “more direct exposure as opposed to taking 5 to 7 percent of sales [in licensing fees].” He said the deal could eventually include opportunities such as licensing certain categories.

Shares of PVH closed at $45.71, down 53 cents, or 1.2 percent, in trading Tuesday on the New York Stock Exchange.

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