By and  on August 16, 2006

NEW YORK — Peter Boneparth needs to come up with another game plan.

On Tuesday evening, Jones Apparel Group said it had decided not to pursue a sale of the company.

"The board has concluded that at this time the best alternative to maximize long-term shareholder value is to continue executing on the company's strategic business plan," Boneparth, Jones' chief executive officer, said in a statement. "The board, management team and I look forward to continuing to grow and strengthen Jones' position as a leader in the apparel, footwear, accessories and retail industries."

Following the decision, observers said Boneparth now must quickly find another way to grow Jones. At the same time, Boneparth will have to cope with softening profits and the continued decline of the moderate market.

Financial sources said the sale process fell apart after Bain Capital, the only remaining company in the bidding, was eyeing an offer of $28 a share, while the Jones board was keen on $36.

Jones shares slipped 1.6 percent on the New York Stock Exchange to close at $29.07.

Financial and industry sources said there are a range of possibilities Boneparth could now pursue, from getting back into the acquisitions game himself to leading a leveraged buyout of the firm — or even selling it to an equity fund, just at a lower price than earlier anticipated.

But clearly the apparel giant is at a critical juncture in its 36-year history. Wall Street performance expectations are higher than ever. Department store consolidation continues as Jones' primary customer base for its moderate business has been whittled down to only four retailers: Federated Department Stores, Dillard's, Bon-Ton and Belk. And if Jones returns to making acquisitions, the field of suitable targets has narrowed significantly after nearly two years of robust mergers and acquisitions.

Jennifer Black, an analyst at Jennifer Black & Associates, said an acquisition spree on the part of Jones "would not be smart because it is getting harder to find things of the right size. Will Jones be willing to pay up if they were to do that?"

Peter Boneparth told the WWD/DNR CEO Summit as far back as 2003 that smaller acquisitions — of less than $100 million — could be difficult to justify. "In our world, at that level, smaller deals really just don't move the needle," Boneparth said. "It probably comes across as arrogance, but it's really not. It's reality."Black isn't sure how Jones can grow earnings, but management will have to figure it out, she said. If the company can't grow earnings, Black said Jones might take a lower bid price than the company asked for during recent bidding, despite saying it is no longer for sale. There's also the possibility of a management-led buyout, Black predicted.

Regarding the current M&A market, there is still truckloads of money looking to be spent, especially from the private equity market. In a recent report by Citigroup analyst Deborah Weinswig on private equity M&As in the retail sector, Citigroup's risk arbitrage team "estimates that buyout firms have about $100 billion of cash to spend, which translates to as much as $500 billion worth of deals," Weinswig wrote.

The analyst said private equity LBOs were robust in 2005, and will continue to be so for the near future. "It is estimated that global private equity funds are on course to raise a record $300 billion in 2006," Weinswig said. "Therefore, it is likely that the number of private equity deals will continue to increase."

For a strategic player, that means tough competition from cash-rich private equity investors.

Interestingly, Weinswig's LBO analysis identified Foot Locker and Liz Claiborne as the most attractive targets in the apparel and footwear sectors, due to "undervalued multiples, stable cash flows, low debt and room for operational improvement."

"These are much more attractive companies," said one hedge fund manager. "Jones has a lot of work to do to make it a worthwhile target."

Regarding profitability measures, Jones has slipped over the past few years. From 2001 to 2005, the company's annual gross margin rate dropped to 36.07 percent from 36.89 percent, while its operating margin fell to 9.8 percent from 11.8 percent. Selling, general and administrative costs as a percent of sales rose during the period to 26.27 from 24.01.

If Jones returns to an acquisition mode, financial sources said the company runs the risk of overpaying for deals. The sources said Jones had overpaid for Maxwell Shoe, Anne Klein and Barneys New York.

There also remains the question of what Jones will do with its moderate brands, as well as Nine West. Private equity sources said there was more interest in the Nine West business than Barneys, attributing that to the accessory division's attractive cash flow. As a stand-alone operation, Nine West was valued at $9 or $10 a share, according to one private equity source. The contact said that left the balance of Jones, including Barneys, valued at about $19 to $20 a share.In the bidding for Jones, sources said Bain Capital was about to walk away from the negotiating table, leaving the vendor without a buyer. The New York Times reported on Tuesday the company's decision to call off a proposed sale.

The Jones board had been keen on a price tag of $36 a share even after several private equity firms indicated they wouldn't buy at that high of a price.

Second-round bids at the end of May by three firms averaged $32 a share, but since then, only Bain Capital stayed in the game. In the last few weeks, Bain was said to be pushing for a bid of $28 a share.

Sources said Bain was getting concerned about the high-yield markets and the paucity of cash flow at Jones. Bain is a much smaller buyout firm than some of the other players involved in the initial bidding, such as Apollo Management, Kohlberg Kravis & Roberts and Texas Pacific Group.

Jones has been working to bolster its cash position by cutting staff and restructuring the business, moves that help on a short-term basis. The longer-term problem, some sources say, is the cash flow going forward. There has been concern about margin pressure as Federated Department Stores continues with its assimilation and conversion of May Department Stores Co. stores. Still, Jones is expected to make further cuts.

By April, all of Jones' Bristol operation will be shut down, according to sources close to the company. One industry contact said about 50 people will be laid off today and another group on Sept. 1. More layoffs are expected in December and again in January.

Designer Rena Rowan Damone of Rena Rowan, said, "I feel very sad because when I left the company in January 2000, it was healthy. I was there exactly 30 years."

Rowan Damone, who worked on the Lauren line during its first two years under Jones, said that losing "Lauren has hurt the company." Jones and Polo split in June 2003, igniting an acrimonious lawsuit between the two companies that eventually was settled. Damone recalled a summertime executive meeting in New Jersey shortly after Peter Boneparth joined Jones. Although retired from the company, she called Boneparth's office to wish him good luck and indicated she would like to meet with him. Rowan Damone said she never got a return phone call.Emmanuel Weintraub, of the consulting firm that bears his name, has worked with Jones in the past, but not currently. "Frankly, they've hit a rough spot," he said. "It's clear that a number of things have not gone well for them. Probably the biggest single blow was the loss of the Polo licenses. That did not help their cause."

Weintraub was quick to say: "This is not a troubled company heading on the verge of bankruptcy. It's not a company that is not profitable. It may not be as profitable as it could be, but Jones does not have really big problems, it's just having a rough patch. The earth did not open up and swallow up Jones. They just couldn't get bought at the price they wanted. They don't have to sell."

Weintraub said he expects Jones to emerge out of this rough spot as a better, stronger company. "The important lesson is your brands have to stand for something," he explained. "They have to move more aggressively out of the middle tier into a more upscale marketplace. They certainly need to work strenuously on Nine West. They have to bring their value proposition in line with the asking price. I am sure the company could have been sold if the price matched the perceived value. Those are tough businesses at that price point."

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