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Xcel Brands Buys Mizrahi for $31.5M

The company is also going public through a reverse merger transaction separate from its acquisition of Mizrahi.

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Isaac, meet Xcel.

Isaac Mizrahi has a new backer in Xcel Brands Inc., which has acquired the designer’s licensing business for $31.5 million.

At the same time as buying Mizrahi’s company, IM Ready-Made LLC, Xcel will go public through a reverse merger agreement with NetFabrics Holdings Inc., essentially a publicly held shell company traded on the pink sheets. The newly merged entity, renamed Xcel Brands, will be a publicly held brand licensing and management company whose priority will be the acquisition of brands having a strong interactive media presence and the ability to utilize a multichannel distribution strategy.

Under the terms of the Mizrahi agreement, Xcel will pay the designer $31.5 million at closing, which includes a combination of cash, a seller note and the issuance of Xcel common stock valued at $13.8 million. Xcel also agreed to an earn-out arrangement with the designer that calls for an additional amount up to $32.7 million in cash or stock, subject to achieving certain minimums in royalties generated by the Isaac Mizrahi trademarks over a four-year period.

The acquisition marks a comeback for Xcel Brands’ chief executive officer Robert D’Loren — and the fourth backer for Mizrahi during his career.

D’Loren is best known for securitization deals that to this day are still unparalleled in the intellectual property field — and that have had a somewhat controversial history.

In D’Loren’s securitization deals, including the $25 million bond securitization of the Bill Blass trademarks in 1999, investment-grade bonds were backed by the income streams associated with the brand’s intellectual property. The cash flow from accounts receivable are first used to pay operating expenses, with the excess income earmarked to pay down the note.

As president and ceo of NexCen Brands Inc., his former company acquired a number of consumer product companies and franchise industries, including Bill Blass, which it acquired in December 2006 for $54.6 million.

When consumers began pulling back on their spending early in 2008, that caused a cash crunch at NexCen. And while NexCen had disclosed the terms of its credit facility in regulatory filings, a question arose whether there should have been greater transparency in connection with its borrowings to acquire Great American Cookies in January 2008. By May 2008, NexCen was fighting to survive as it suffered a liquidity crisis. Five months later, D’Loren resigned from the firm. NexCen began selling off its holdings, including Bill Blass, which was sold to Peacock International Holdings for only $10 million in cash in December 2008.

According to a NexCen quarterly filing, or Form 10-K, with the Securities and Exchange Commission in August 2010 for the quarter ended June 30, the enforcement division of the SEC after a two-year investigation said it did “not intend to recommend” any action by the SEC.

Securitization issues won’t be a problem for D’Loren’s latest brand acquisition, which is a straight asset purchase of the trademarks.

Mizrahi, who will serve as chief designer, said, “We’ve spent nearly a year working closely with Bob D’Loren and look forward to joining him at Xcel. I’m pleased to be such a significant shareholder in the company, and believe that we are poised for growth.”

The transaction is the latest in a series of changes for Mizrahi, first with Chanel until they parted company in 1998, and then a collection at Target that ended in 2008, even though annual volume was estimated at $300 million a year.

The colorful and opinionated Mizrahi has a daily Web series featuring his take on cooking, style and fashion, at watchisaac.com. There’s also a media presence via isaacmizrahiny.com, where visitors to the site can watch the designer’s video blogs.

Mizrahi’s licensing business includes the lifestyle collection, IsaacMizrahiLIVE, which is sold at home shopping specialist QVC, and Liz Claiborne New York, also sold at QVC, in which Mizrahi is the creative director per a design agreement. The main Liz Claiborne line, in which Mizrahi has no involvement, is sold exclusively at J.C. Penney.

Market sources estimate that royalty income for Mizrahi totals at least $10 million annually.

Mizrahi’s high-end Collection line, not part of the Xcel acquisition, will likely be phased out and repositioned as a licensing business. He has shown that collection in the past during New York Fashion Week but did not show this season.

Current plans are for additional licensing agreements for different apparel lines, footwear and home categories to launch at better retailers in fall 2012.

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