By  on November 16, 2006

After years spent divesting assets, Leslie H. Wexner surprised Wall Street late Wednesday with the $628 million acquisition of Canadian lingerie retailer La Senza.

The deal reinforces one of the areas Wexner sees as the future of Limited Brands — innerwear (the other is beauty) — and turns the U.S.-focused retailer into an international one in one fell swoop. La Senza operates 318 stores in Canada and 327 licensed units in 34 countries under the banners La Senza, La Senza Express, La Senza Spirit and La Senza Girl, which is a tween brand that sells both intimates and apparel.

Limited revealed the acquisition after the market closed and at the same time reported a swing to a third-quarter profit from a loss a year earlier. For the quarter ended Oct. 28, Limited posted net income of $23.5 million, or 6 cents a diluted share, which compares with a prior-year loss of $683,000. Sales leaped 12 percent to $2.1 billion from $1.96 billion.

Wexner, the chairman and chief executive officer of Limited Brands, said in a statement that the La Senza deal, which is set to close in January, "is all about achieving growth for two companies that share similar values. La Senza is a very well run business, and we look forward to partnering with its management team, who will continue to operate the company in the normal course of business."

The transaction caught the market by surprise. At the bell, shares of the retailer dropped 0.7 percent to $31.78 but were off 5 percent in the hour after the market closed. The Limited said the price tag represented a premium of 47.8 percent over La Senza's closing price on the Toronto Stock Exchange.

"La Senza is a great strategic fit with our intimate apparel business, and their international infrastructure, real estate expertise and operating model will also be great assets to us as we look to enhance our capabilities to meet our strategic growth initiatives internationally," Wexner added.

The company said the acquisition will be "modestly accretive" to Limited Brands' earnings per share in 2007. Banc of America Securities and Financo Inc. served as financial advisers on the transaction.

"This gives The Limited a second intimate apparel brand with global recognition. The international infrastructure will allow The Limited to create a truly global intimate apparel company," said Gilbert Harrison, chairman of Financo.Harrison said his company introduced Irv Teitelbaum, chairman and ceo of La Senza, to Wexner and Len Schlessinger, chief operating officer of The Limited, in 2004, but that "serious discussions" didn't start until last summer.

La Senza once had stores in the U.S., but they were shuttered. Harrison doesn't rule out the possibility of La Senza stores in the U.S. at some later date. "For now, however, The Limited has a huge platform to grow its Victoria's Secret brand in the U.S. and to use La Senza to grow internationally."

The Limited hasn't made a major acquisition since the mid-Eighties. Starting in 1998 with Abercrombie & Fitch, the company began divesting itself of portions of its business, either selling brands or spinning them off into independent companies. Limited Too was spun off in 1999, and Lane Bryant was sold to Charming Shoppes in 2001. In 2002, Lerner New York and New York & Co. were sold. The company also sold off its interests in Galyan's Trading company and Alliance Data Systems, in 2004 and 2003, respectively.

Intimate Brands, which encompasses Victoria's Secret and Bath & Body Works, was established as an independent company in 1995 but rejoined The Limited to form its current incarnation in 2002. Today, these brands make up the largest divisions of the company. Recently, the retailer has focused more on extending and expanding its existing brands.

"Our initial focus is to support La Senza on their growth plans and use it as a platform to learn about international business," said chief financial officer Martyn Redgrave on the conference call. "Beyond that, I expect we will be able to take advantage of the platform and not only take La Senza further internationally but crack the code to the international expansion of Victoria's Secret."

Limited has been extremely cautious over the years about international expansion. The only international retailer it owned before this was the small personal care chain Penhaligon's, which Wexner bought in the Eighties and subsequently sold. Earlier this year, during a WWD Beauty Summit, Wexner said he expects to "double our beauty and cosmetics business in the next five years in the lower 48 states. We're not really excited about Hawaii and even Alaska. We're Midwesterners, and that's where we think our growth is. We think the industry is going to grow enormously."Regarding its quarterly results, the company said total same-store sales increased 10 percent. Results were buoyed by solid sales at Victoria's Secret and Bath & Body Works, which reported comps of 17 percent and 15 percent, respectively.

For the nine-month period, earnings increased 44 percent to $236 million, or 59 cents a diluted share, from $164.1 million, or 40 cents, in the year-ago period. Sales jumped to $6.65 billion from $6.16 billion.

Limited expects fourth-quarter earnings in the range of $1.07 to $1.14 per share.

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