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Calvin Sells

NEW YORK — It might have taken an eternity, but Calvin Klein and Barry Schwartz finally found their match on Tuesday with Phillips-Van Heusen Corp., in a deal worth as much as $700 million.<br><br>What’s most impressive about the...

NEW YORK — It might have taken an eternity, but Calvin Klein and Barry Schwartz finally found their match on Tuesday with Phillips-Van Heusen Corp., in a deal worth as much as $700 million.

What’s most impressive about the transaction from Klein’s perspective is the ability to continue to grow the Calvin Klein labels into big volume businesses in underdeveloped apparel categories, while also leaving him the personal room to focus on the big picture as a significant shareholder in PVH. The deal includes ongoing financial incentives tied to future sales of the Calvin Klein brand.

Klein and his longtime business partner Schwartz will each immediately pocket $215 million in cash and stock from the deal. Schwartz is expected to step back from the company but will consult to CKI.

The deal with PVH confirms a report in WWD Monday.

In an interview following the confirmation of a deal, Klein had his own take:“Let ’s put it this way,”he said, “I have a long-term emotional,as well as financial,in- terest in the success of this business.This has been my life.It ’s a company not just about me,but also a lot of in- credibly wonderful people.I care about this and I have a financial interest in seeing it do well.”

During a conference call earlier on Tuesday evening, PVH chairman and chief executive officer Br ce Klatsky had a lot to crow about as he revealed that his two-year pursuit of Calvin Klein Inc.had come to a successful con- clusion,considering the number and scope of competitors that have pursued the 34-year-old fashion house over the past several years.“This is,without a doubt,the greatest day of my business career,” Klatsky said on the call..

PVH — which said it expects CKI to have operating income of $40 million to $50 million next year — an- nounced Tuesday that it had signed a cash-and-stock deal to acquire the company for $430 million up front, with additional payouts of as much as $270 million in the coming years.PVH ’s first priorities for the brand, which will be set up as an independent division within PVH,headed by existing CKI president and chief oper- ating officer Tom Murry,will be to launch new women ’s and men ’s main floor sportswear lines.Klatsky said he believed those businesses were a $1 billion opportunity. He said on the conference call that about 60 percent of CKI ’s sales are domestic with the balance coming from abroad.He also said he saw sales overseas,particularly in Asia,as a key growth opportunity.

“We are presently in conversations with a number of the largest women ’s apparel companies and have a number of other opportunities to launch a major women ’s sportswear effort,”he said.The company plans to handle the proposed men ’s line in-house,but recently made news with a major licensing deal with Kellwood Co.to develop its Izod brand into women ’s better-priced sportswear,which many executives view as a precursor to a potential example for a similar arrangement with Calvin Klein.Klatsky also warned investors in a conference call not to expect an immediate payoff from the move,which he said would reduce earnings next year,but start to boost them in 2004.

“We cannot and will not,under any circumstances, diminish the integrity and the brand positioning,”he said.“We have been very aggressive in building market- ing budgets and staffing budgets and design budgets to preserve the brand.”

Still,he left no doubts about the role of the Calvin Klein brand in PVH for the coming years.“This is the growth engine for the future of the com- pany,”he said.“We ’re going to do it cautiously,we ’re going to do it carefully and we ’re going to preserve the integrity of the Calvin Klein brand.”

The deal,which is subject to regulatory approval and is expected to close within 60 days,includes $400 mil- lion in cash,and about $30 million in PVH stock,with additional incentives to Klein personally based on fu- ture sales of the brand.The cash is being put up by Apax Partners Inc.,a New York venture-capital firm, that will receive convertible PVH stock that could even- tually give it a 33 percent stake in the garment company. The convertible shares have an exercise price of $14,a $1.46 premium on Tuesday ’s closing price.

Klein and Schwartz will receive shares representing a 4.4 percent stake in PVH.Paul,Weiss,Rifkind, Wharton &Garrison served as legal counsel to CKI.“Bruce came to Barry about two years ago,with this idea of talking and getting to know each other,”Klein said in the interview,where he was joined by Klatsky. “The longer we got to know each other the more I be- came really excited about this.This is one of the most exciting moments in my life.”

Although initial reports of the interest of PVH,as well as VF Corp.,have created a lot of anxiety within the halls of CKI because of the perception of a culture clash between a designer business and one that specializes in mid-priced men ’s dress shirts,both Klein and Klatsky said what ltimately allowed the PVH deal to reach a conclusion —after negotiations with so many other com- panies had failed over the past few years —was a level of comfort between the executives in their ability to work together on a long-term basis.Earlier this year,CKI entered a licensing partnership with PVH to produce men ’s dress shirts and formal shirts that served as some- what of a testing ground for that relationship.

“Quite frankly,I wanted and believed that we needed a company with the resources to take our brands to the next place,”Klein said.“Barry and I have explored sev- eral options over the last few years and I never felt com- fortable with anyone that we talked to.I never felt that it was the right deal for the company,and where I want to take it.This is it.”

Others might have more prestige,like Gucci Group or LVMH Moët Hennessy Louis V itton,but Klein is more interested in the prospects of big-volume busi- nesses,and pointed to new opportunities the PVH deal will allow to grow his name.

“They have the know how,the resources and the ener- gy to grow those businesses,while they also respect the integrity of the collection business,”Klein said.“I ’m in big business already with fragrance,jeans and underwear. But we are so underdeveloped in men ’s wear and selling sportswear at better prices where my competition is. We ’re underdeveloped around the world.Br ce can take us to the next place.They are a well-managed company and a disciplined company,which is something I need.”

In its global research during due diligence,Klatsky said the company found Calvin Klein to be the top- ranked fashion lifestyle brand on the planet,a critical point in securing the financing deal with Apax Partners to back its investment.

“We ’ve been looking for a great brand franchise that shone like a diamond,”Klatsky said.“We ’re convinced that there is real vision there and that we can take this company and build the business to the size that the brand deserves.”

Klein and Klatsky said Schwartz is expected to contin- ue to consult on the business,but they also expect he will ultimately spend more time pursuing his well-known love of horse racing through his outside position as chairman and ceo of the New York Racing Association.Klein,who is 60,is said to be bound by a 15-year “golden handcuff ” that limits his ability to work elsewhere,but rewards him handsomely for his performance.

Asked what his exact role in the business would be, he replied,“I ’m going to be involved in all the areas that I have been involved with up until now.I ’m going to help Bruce and his team to take the company into new businesses,strategize how to really expand and opti- mize the opportunities we have and clearly stay in- volved in the areas that I ’m normally involved with, such as design,marketing,advertising and brand posi- tioning.But I am really going to focus on how to grow the brand,as opposed to being just involved in the day- to-day stuff.This gives me the opportunity to really think and help Bruce to strategize the group.”

Another factor that was likely an incentive for Klein to sign with PVH was Klatsky ’s assurances that PVH would remain hands-off when it comes to Klein ’s signa- ture collections and his marketing and advertising ini- tiatives.While PVH plans to put its expertise to work on the back end of the business,Klatsky said he would not try to integrate its designer operation into the PVH fold.

“The biggest question we asked ourselves is how can we optimize this business and not homogenize it into PVH?”Klatsky said.“We are not going to integrate the design or marketing efforts into the company.It ’s going to continue to be run by Tom Murry and he ’s going to operate those design studios and the marketing machine totally independent from PVH.”

Next spring,PVH plans to issue about $125 million in debt to help fund the new business,officials said.

Klatsky said the deal would reduce 2003 earnings by about 10 cents to 13 cents per share.Analysts had ex- pected the firm to net $1.16 a share next year,according to Thomson Financial/First Call.In 2004,he added,the CKI business would likely boost earnings by 2 cents to 4 cents a share.

Last year,PVH earned 38 cents a diluted share,or $10.7 million on an net basis.Sales were $1.43 billion.

While PVH has big plans for the sportswear business- es,the most immediate gain from its CKI acquisition will be the designer ’s hefty royalty stream,which amounts to about $120 million a year,Klatsky said.Still,given the heavy costs of promoting the brand —including a planned advertising budget of $200 million a year,mostly paid by the licensees — PVH expects the CKI business ’ operating income next year to come within the $40 mil- lion to $50 million range after deducting design and other staff expenses,company-owned stores and “owner ” expenses,meaning those for Klein and Schwartz,accord- ing to Emanual Chirico,executive vice president and chief financial officer.In 2004,he said,that number should rise to the $55 million to $65 million range.

The biggest question on the minds of Klein watchers since the designer put his house on the block three years ago —originally with an asking price of $1 billion —was how the designer ’s relationship with Warnaco Group Inc.would affect any proposed deal.The now- bankrupt Warnaco holds long-term licenses for the CK Jeans business and owns the Calvin Klein innerwear brand outright.

PVH ’s Klatsky said he was comfortable with those deals,which generate about 25 percent of the brand ’s royalty stream.He also later acknowledged that PVH had looked at the Warnaco businesses,but told WWD,“We have a full plate with taking care of these growth opportunities.Never say never,but it ’s not a major issue for us.

“We started this process by looking at the Warnaco assets,and in looking at Calvin Klein,decided internal- ly we wouldn ’t buy the Warnaco assets unless we were able to buy Calvin Klein because of the unbelievably strong control that Calvin has,in particular over the jeanswear license,” he said..

While looking at Warnaco,Klatsky said,“We got very comfortable with the infrastructure built under [Warnaco president of sportswear ] John Kourakos..”

He added,“We considered buying both [CKI and Warnaco ]but decided we would be putting too much on our plate to do that.”

Kourakos late Monday noted that he started his ca- reer in the apparel business at PVH at around the time Klatsky and president and chief operating officer Mark Weber started there.

“I look forward to working with them,”he said.

PVH is likely not the only player to have contemplat- ed such a move.As reported,Greensboro,N.C.-based VF Corp.was said last week to be putting together such a deal,though sources said Klein and the Warnaco board voted it down.

VF officials have neither confirmed nor denied those reports.

Klatsky seemed to allude to the competition when he said,“We did this in the Phillips-Van Heusen fashion, unintimidated by any other bidders for this company.”

The deal puts Apax,which manages over $11 billion in institutional investments,in a position to influence PVH ’s future.David Landau,general partner at the New York firm told WWD that Klatsky approached him about the deal about a year ago.

“PVH has a great management team and this is a powerful brand,”he said.“There is tremendous poten- tial for the brand to grow in the U.S.and abroad.”

Apax is no stranger to the world of fashion and retail- ing.Over the past two decades,it has invested in compa- nies including Sephora,Sunglass Hut and Office Depot.

Andrew Jassin,a principal in the New York consul- tancy Jassin-O ’Rourke Group,said he believed the match-up is logical.

“In terms of strategic partnership,it makes sense in the fact that Phillips-Van Heusen has a very large distri- bution network throughout the U.S.and is currently in a variety of brands,”he said.“They ’ve demonstrated an ability to be a brand-management firm,to be managing their own brands,as well as licensed brands.”

Further,he said,PVH ’s retail operations —it runs more than 700 company-owned outlets — are another plus..

“They have a unique ability to be in the retail business and manage those abilities profitably,”he said.“A brand strategy can ’t work today…unless you have a well-positioned,well-thought-out retail strategy.”

It ’s been three years since Klein first put his compa- ny on the block —back during the boom he was seeking $1 billion for his firm —and Jassin said pricing was likely a key reason that it ’s taken so long to sell CKI.

“The Calvin business has probably not been trend- ing upwards and yet there is a premium on the busi- ness ”he said.“The valuation of a business such as Calvin,which is a premium name even though the business probably isn ’t terrific at the moment,is diffi- cult to understand.”

Another key snag,he suggested,may have been CKI ’s relationship with bankrupt Warnaco Group Inc.,which holds the license to the CK jeans business and owns the rights to the Calvin Klein name for innerwear.The fact that Warnaco appears on track to emerge from bank- ruptcy next year may have made it easier for PVH to enter into a relationship with it.