NEW YORK — The red-hot merger and acquisition market of last year is continuing into 2006 and Eddie Bauer is the latest target in the sights of strategic and financial players.
The M&A frenzy was further in evidence Monday with two big deals: The Sports Authority said it was being acquired for $1.3 billion in a partial management buyout (see related story, page 16), while CVS Corp., Supervalu and an investment group led by Cerberus Capital Management LP teamed up to buy supermarket and drugstore retailer Albertson's for $17.4 billion in stock, cash and debt.
These deals come one month after a year that has been described as the best M&A activity since 2000. In 2005, there were more than $2.7 trillion in mergers and acquisitions announced worldwide, $1.13 trillion in the U.S. alone, according to Thomson Financial. But if there was $100 billion in private equity money out there chasing acquisitions in 2005, observers say there's just as much around this year.
Regarding Eddie Bauer, financial sources said that among those eyeing the outdoor lifestyle firm are VF Corp., Liz Claiborne, Kohlberg Kravis Roberts & Co. and Texas Pacific Group. Of the four, VF is said to be "very interested" in Bauer. Claiborne, while keeping tabs on the specialty outdoor brand, is also in the midst of negotiations to acquire J. Jill Group Inc.
While Texas Pacific Group is the latest private equity firm said to be checking out Bauer, KKR is the buyout firm with the most extensive knowledge of Bauer's operations. KKR has bid before for Bauer, but was rebuffed by former parent Spiegel's creditor constituency during the catalogue retailer's bankruptcy. Spokesmen for KKR and TPG both declined comment Monday.
Bauer isn't officially up for sale, but it is said to be open to offers at the right price, financial sources said. A spokeswoman for Bauer declined comment.
Financial sources, including buy-side portfolio managers and analysts, said VF Corp. is keen to buy an "outdoor lifestyle" brand. At investment conferences earlier this month, these sources said VF executives told attendees it is looking for acquisitions with price tags of between $400 million to $1 billion, and that the preferred range is between $600 million to $800 million. VF, through its experience buying the Nautica brand, is said to be willing to buy a "situation that requires a turnaround," said one analyst.A spokeswoman for VF said the company is "aware of every opportunity and is taking every opportunity to evaluate them. We do not comment on any particular brand or opportunity. That said, we are looking for strong brands, lifestyle brands…and outdoor and sportswear brands are interesting for us." She said the company, before it makes a purchase, needs to make sure it is a "prudent acquisition and fits our overall strategy."
Bauer fits in with the current rush into the outdoor sector as an acquisitions target. Claiborne — which last year bought yoga and outdoor brand Prana and which is looking for a retail operation — is also said to be eyeing Bauer, but seems more interested in getting a deal done with J. Jill, a sell-side analyst said. Executives at Claiborne could not be reached for comment.
The number of strategic players eyeing Bauer could even get more intriguing.
The outdoor lifestyle firm earlier this month signed a licensing agreement with JLA Home to create an Eddie Bauer soft textiles line for the home to be distributed to department stores at mid-to-better price points.
One strategic firm that some institutional investors are tracking is Talbots Inc. The women's apparel specialty retailer told investors at a break-out session following its company presentation at a Florida conference that it was interested in making an acquisition, particularly a retailer having a catalogue operation focused on home and the outdoors. A spokeswoman for Talbots declined comment. While Talbots supposedly eyed J. Jill, it is said to be looking for growth in venues outside of its core competence in the women's apparel scene.
Founded in 1920 in Seattle, the 399-unit Bauer chain caters to men and women ages 35 and 54 with an average annual household income of $75,000, according to a regulatory filing. Bauer distributes its merchandise through two channels of distribution, retail stores and outlets located in the U.S. and in Canada, and direct-to-consumer through catalogues and its Web site. The company has a workforce of about 524 employees at its corporate headquarters in Redmond, Wash.
Bauer became mired in bankruptcy court proceedings when Spiegel filed for Chapter 11 on March 17, 2003. Bauer was spun out of Chapter 11 as a stand-alone firm on June 21. Last month, Eddie Bauer Holdings filed a registration statement, or Form 10-12G, seeking to become a public company that trades on the Nasdaq by Feb. 13. The company is obligated to file a registration statement to trade publicly as part of its reorganization plan and exit from Chapter 11.The company has already issued 30 million shares to nearly 600 shareholders who primarily are owed $1.3 billion in debt by Spiegel during the bankruptcy. Holders include Commerzbank AG of Germany, Dresdner Kleinwort Wasserstein and DZ Bank AG. The shares are tracked by the Pink Sheets and currently trade around $13.75. Bauer can issue up to an additional 100 million shares of common stock. A Bauer spokeswoman said no decision has been made on whether the company will issue more shares.
The company currently does about $800 million in annual sales. At one point in 2000, it did around $1.6 billion, but it has since seen both its sales and store base decline. The Form 10-12G registration filing said only about 20 percent of Bauer's stores fit its preferred 5,500-square-foot footprint, which would necessitate a realignment of its stores. The size and number of its stores has been a recurring issue for the outdoor retailer for some time.
In April 2003, a month after Spiegel filed, credit sources said that Spiegel was hoping to get close to $200 million for the then 535-unit chain. One potential investor at the time said it walked away from a purchase because the $200 million was deemed "too high" for Bauer in its format at the time. The thought was that at least 200 stores needed to be pared down.
About 88 stores were shuttered during the bankruptcy, and Bauer also closed its home collection concept stores.
A year later, the now-defunct parent corporation was trying to sell Bauer. Competitor L.L. Bean looked at it and decided against an acquisition. Strategic players also snooped around, but didn't bite. At the time, Bauer's retail, catalogue and online businesses generated about $1.25 billion in annual sales. Still, financial and credit analysts thought Spiegel would be lucky to fetch $750 million.
Private equity firms Bain Capital, Apollo Management, KKR, Cerberus Capital Management and the private equity arm of Credit Suisse First Boston eventually bid for Bauer in August 2004. Spiegel elected to pull Bauer from the auction block when bids came in between $600 million and $700 million, far lower than the $1 billion Spiegel and its creditor group were seeking.
Lately, Bauer has been struggling with its fall 2005 merchandise. According to the filing, it had too many bright colors and winter-weight apparel during the unseasonably warm fall and winter months. In addition, the filing said that the women's and men's bottoms' categories lost some ground because of fit and quality issues.In addition, earlier this month the company's chief financial officer, Timothy McLaughlin, left. Spencer Stuart is conducting the search for his replacement.
The company said in its Form 10 filing on Dec. 15, "We believe one of the key reasons for our declining net sales and declining traffic in our stores is lackluster product design that has resulted, over time, in a stale brand image. Despite these issues, the Eddie Bauer brand continues to be a well-recognized brand with high brand awareness and relatively high favorability among specialty retailers (according to a 2004 study commissioned by us and conducted by Harris Interactive, in 2004 Eddie Bauer had the second highest aided brand awareness among six U.S. casual apparel retailers that target adults, including Gap, Banana Republic, L.L. Bean, Lands' End and J. Crew, with aided awareness defined as a person's expressing familiarity with a brand when it is read from a list). However, we believe our target customer does not find the brand to be relevant enough to today's lifestyle."
In addition to revamping its product offerings, the company over the last 18 months hired several key executives across a broad range of areas such as merchandising, design, marketing, creative, legal and finance. The senior management team members have held previous posts at firms such as Hennes & Mauritz AB, J. Crew, Tommy Hilfiger, Banana Republic, Ann Taylor and Starbucks.
As well as the new home textiles license with JLA Home, the company licenses its name to various consumer product manufacturers and other retailers whose products complement its "modern outdoor lifestyle" brand image. Ford Motor Company licenses the Eddie Bauer name and logo on premium Explorer and Expedition models. American Recreation Products Inc. uses the Bauer name on camping gear.
Regarding CVS Corp.'s acquisition announced Monday, the retailer said it plans to acquire about 700 stand-alone Sav-on and Osco drugstores as part of the Albertson's deal.
The acquisition by CVS, a transaction valued at $2.93 billion, will give the Woonsocket, R.I.-based drug chain some 6,100 stores in 42 states. The deal is expected to close in the middle of the year.
Half of the stores CVS is acquiring are located in Southern California, the retailer noted. The acquisition "provides immediate market share leadership in the high-growth, Los Angeles/Orange County and San Diego markets, which are new markets for us," Tom Ryan, chairman, president and chief executive officer of CVS said in a statement, "and also strengthens our position in many existing markets in the Midwest and Southwest."CVS will not acquire the Sav-on and Osco names and the stand-alone stores will be renamed CVS, according to Albertson's. Fitch Ratings placed CVS on Rating Watch Negative following the announcement of the deal.
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