Phillips-Van Heusen Corp. might have inked a deal to acquire Tommy Hilfiger from Apax Partners, but it still has to secure financing for the $3 billion acquisition and has been out drumming up interest.
On Tuesday, Moody’s Investors Service gave the firm’s proposed $2.45 billion in bank loans to close the transaction a rating of “Ba2,” two notches into speculative or “junk” territory. PVH’s pitch is relatively straightforward. PVH is planning to use its free cash flow — which should top $200 million the first year after the deal and $300 million by year three — to cover payments on the $2.45 billion in debt. Cash flow excites debt holders because it is a sign of financial strength and the vitality of the business as well as its ability to make good on its obligations.
“It’s a very robust cash flow story,” said Emanuel Chirico, PVH’s chairman and chief executive officer, at the Barclays Capital High Yield Bond and Syndicated Loan Conference last week. “It allows us to pay down debt quickly, get the earnings benefit associated with that and be able — in a relatively short period of time, between two-and-a-half and three years — to get our pro forma debt-to-EBITDA ratio back below 2.5-times.”
Chirico, regarded as the architect of the Calvin Klein acquisition by PVH in 2002, touted the company’s ability to make and efficiently absorb acquisitions.
The firm, which with the purchase of Hilfiger will nearly double in size to about $4.6 billion, will also cut away some redundancies and potentially use Hilfiger’s European presence to expand its Izod, Arrow and Van Heusen names. In addition to taking on the debt, PVH plans to issue stock to Apax, use $385 million of its cash on hand and issue about $200 million in common stock prior to closing.
PVH’s proposed debt financing for the deal includes a $450 million five-year revolving credit facility, a $500 million five-year term loan and a $1.5 billion term loan.
The rating on the financing package is in line with the company’s current credit profile and is likewise subject to “high credit risk.” Moody’s said earlier this month that the deal would likely push PVH’s corporate family credit rating down one notch to “Ba3,” but the debt rating agency said the rating on the bank loans would hold steady.
“The rating is one notch higher than the expected post-acquisition corporate family rating, reflecting the security interests of these loans in the significant majority of PVH’s consolidated assets following the acquisition of Tommy,” Moody’s said.
Banks traditionally make sure they are among the first paid back in the event of a default.
The acquisition is a sign of the times. Not only does it continue the theme of consolidation that’s seen the big grow ever bigger, but it also reflects the growing belief that international markets now represent fashion’s major growth opportunity.
“It provides us with a growth vehicle that’s driven much more...from the international markets and will really change the face of the company,” said Chirico at the conference. After the deal, 60 percent of PVH’s profits are expected to come from international markets, as opposed to 30 percent now.
“We think we’re [going to be] a much more balanced company, much more geographically diverse and much stronger to pursue the growth of both companies going forward with a very complementary strategy,” he said.
Shares of PVH inched up 6 cents to $57.08 on Tuesday. Investors have been bullish on the deal, driving the stock up 19.6 percent since the acquisition was made official March 15.
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