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The denim world has a touch of M&A fever.
This story first appeared in the May 13, 2013 issue of WWD. Subscribe Today.
On Friday, three brands — True Religion, Jag Jeans and Christopher Blue — were part of two separate deals on the mergers and acquisitions front.
True Religion Apparel Inc. entered into an agreement to be acquired by TowerBrook Capital Partners in a transaction valued at $835 million, which includes the $220 million in cash that’s on the apparel firm’s balance sheet.
Separately, Western Glove Works, the Winnipeg-based owner of Silver Jeans Co., acquired Simply Blue, marketers of the Jag Jeans and Christopher Blue denim brands, from New York-based W Diamond Group Corp., marketers of Hart Schaffner Marx and Hickey Freeman, for an undisclosed amount. Jag and Christopher Blue will operate as SB Operations Inc. under the direction of Barry Bates, president, and maintain headquarters in Seattle. Bates will report to Bob Silver, president of WGW.
The True Religion transaction took many by surprise as the company, advised by Guggenheim Partners, has been on the market for eight months without any deal in place and speculation grew in the last three months that the process had hit a brick wall.
Last December several bidders surfaced as potential buyers, with Sycamore Partners supposedly having the inside track, according to sources at the time who are close to the company. Then Sycamore acquired Hot Topic, and went on to enter into exclusive talks for Australian surfwear brand Billabong. This week, some investors even thought Sycamore could reenter the picture now that Billabong has supposedly restarted talks with VF Corp. and Altamont Capital.
Under the terms of the agreement, TowerBrook will acquire all of the outstanding shares of True Religion common stock for $32 a share in cash, representing a premium of 52 percent to the denim firm’s share price on Oct. 9 before it revealed it had begun to explore strategic alternatives. TowerBrook divested its Jimmy Choo investment by selling to Labelux GmbH in 2011. Its current fashion holding is U.K.-based firm Phase Eight.
If approved by shareholders, the deal, already approved by True Religion’s board, is expected to close in the third quarter.
Seth Johnson, a lead director at the denim company, said, “Having considered alternatives over a seven-month period, the special committee believes TowerBrook’s $32 per-share cash offer for the company is in the best interest of our shareholders.”
Andrew Rolfe, managing director of TowerBrook, said, “True Religion is an established, high-end brand with a strong retail network and a loyal following. ”
Financial and market sources expect Rolfe to become chairman of True Religion.
Given the acquisition price, what could that portend for Lucky Brand Jeans, which was put on the market by Fifth & Pacific? Several sources didn’t think that the sale of True Religion would have any impact on boosting the price of Lucky Brand, which has an asking price in the $400 to $500 million range. “Lucky is below the premium market, with 30 to 40 percent of its business around $100. It has huge international potential, since its business is domestic, but Lucky needs to be remerchandised. It’s currently stuck in the ‘old Americana’ mind-set with washes that have not kept up with the trends that European and Asian consumers are seeking,” one market analyst said.
Shares of True Religion rose 8.1 percent to close at $31.82. The company on Friday also posted first-quarter results, in which net income fell to $526,000, or 2 cents a diluted share, from $10.4 million, or 41 cents, last year on a net sales gain of 13.5 percent to $120.8 million from $106.8 million. Excluding one-time charges, such as those connected to the review of strategic alternatives, adjusted net income for the quarter was $5.7 million, or 22 cents a diluted share.
Robert L. Chapman Jr., managing member at Chapman Capital and an investor in True Religion, said of the transaction: “That’s a huge bet on past-their-fashion-peak jeans selling for $250 a pair. TowerBrook better hope that the 20 percent EBITDA margins don’t collapse.”
He’s not wrong. Many investment bankers and investors who have looked at the books and then chose not to bid thought that even a $500 million deal at one times sales was too high. Some cited past denim deals that were done at the height of a particular brand’s popularity when margins were still high and before being seemingly outclassed by the rise of younger, cooler brands: Berkshire Partners’ 63 percent stake in Citizens of Humanity in 2006 for $250 million, and Fireman Capital Partners’ and Webster Capital’s $33 million minority stake in Hudson Jeans in 2009. Both denim brands were shopped and are now off the market.
A source familiar with the deal and close to the apparel firm said, “True Religion built a very interesting brand over the past decade, growing from zero to half a billion in sales.” He noted that the new owners will have to get the right team in place now that founder Jeff Lubell is gone and figure out where the brand should be positioned. “The brand is at a real inflection point at this time….We’ve seen brands that go urban and go outlet [and here they’ve lost their whole women’s business] change pretty quickly,” this person said, pointing out that there’s a good chance for sustained growth if the company can fix its women’s business.
Andreas Kurz, president and owner of fashion consultancy Akari Enterprises and former ceo of Seven For All Mankind, said, “I think that the brand still has potential in Europe and in Asia. If they can update their assortment and product offerings in women’s, that business could make a comeback. It will depend too on price strategy and whether they want to stay in the superpremium denim space.”
Lynne Koplin, interim ceo and president of True Religion, said of the women’s business: “The potential is there. We just need to do it the right way.”
Women’s was once a bigger business than men’s. According to Koplin, there’s a new design team at the Vernon, Calif.-based firm to get women’s back on track. That includes “developing the women’s nondenim bottoms business, adding more [offerings to give women’s] a collection perspective and also including more denim-related sportswear,” she said.
Speaking of the Simply Blue transaction, Silver estimated that the SB operations would account for about 15 percent of WGW’s annual revenues. With sales before the acquisition of $150 million, that would put SB’s at about $28 million, with the combination of the two brands and the larger Silver approaching $180 million.
W Diamond is the company formed by Doug Williams to manage, through a 40-year license, the branded businesses acquired by Authentic Brands Group when it picked up the portfolio of HMX Group in December for $72.3 million following HMX’s bankruptcy. Jag has been owned by WGW but managed by Simply Blue through a marketing arrangement. According to James “Jamie” Salter, president and ceo of Authentic Brands, Authentic sold Christopher Blue to W Diamond to simplify the transaction.
Silver said, “The two brands have clearly suffered, as all products suffer when they face financial difficulties. But through it all, Jag has maintained its presence and volume and I’ve always maintained that both Jag and Christopher Blue have real potential to be a factor in the marketplace. The products don’t need to be fixed, although they do need to get a greater level of support.”
Both brands have their origins in jeans but have expanded into a broader assortment in the years since the founding of Simply Blue by Mel Matsui, who passed away last month at 68.
Silver noted that the key difference between the two brands and Silver is in demographics, with Silver skewing toward a younger customer and the acquired brands towards a more mature woman. “Jag is more fashion forward than Silver and Christopher Blue a bit more forward than Jag,” Silver noted. “Jag was among the first that went after a slightly older customer and we’re seeing that position eroded by players like NYDJ. We can regain some of the market share we lost there, and I think Barry and his tight team in Seattle are the right ones to take this on. There are some synergies to be gained in back-office and credit operations, but synergies will only get you so far. The chemistry is there and that’s more important.”
He described the retail distribution of the two brands in terms of two of their largest customers: “Christopher Blue is more Neiman Marcus and Jag is more Nordstrom.”
The move is a further step in WGW’s evolution from private-label manufacturer to branded marketer. The company was founded in 1921, ceased production of gloves in the Forties to focus on jeans and workwear, and in recent years has outsourced its production and focused entirely on Silver.
The deal relieves W Diamond of a noncore asset, allowing it to focus on its men’s tailored clothing business. Misook is the only nonmen’s asset remaining in the former HMX portfolio. Authentic’s Salter told WWD that it has received queries about a possible licensing deal or acquisition and might entertain such a move “at some point.”
Williams, ceo of W Diamond and former ceo of HMX, commented, “As the W Diamond Group Corp. continues to focus on its core businesses, we felt that for the growth of Jag Jeans and Christopher Blue, the synergies of Western Glove Works will give these brands the best resources for growth.”