By  on August 16, 2007

NEW YORK — Li & Fung USA has acquired Regatta Pacific Alliance for a minimum of $145 million — a move that puts the companies at the forefront of proprietary brand development.

The deal is expected to close by the end of the month. Industry sources in Hong Kong said Li & Fung USA, a subsidiary of Hong Kong-based Li & Fung Ltd., could pay an additional amount in "excess of $100 million" if certain earn-out targets are met. Earn-out agreements in mergers and acquisitions deals typically are over a five-year period, said investment bankers not connected with the Li & Fung and Regatta transaction.

Rick Darling, president of Li & Fung USA, said Haim Dabah will continue to serve as chief executive officer of Regatta, and will also become a member of the Li & Fung USA executive board, as well as Li & Fung's corporate policy committee. In addition, the entire management team at Regatta will continue to run Regatta.

"We've been talking to Haim and his team for 18 months, and we have recognized Regatta as the market leader in the development of proprietary brands," Darling said.

Retailers have been seeking new ways to reach out to their target customer base, and many are searching for proprietary brands to draw consumers into their stores. And while Polo Ralph Lauren Corp. is doing that with American Living in partnership with J.C. Penney Co. Inc., its entry into the proprietary space with its new Global Brands Concept is seen as a validation of the business model.

Regatta has been at the forefront of proprietary brand development. The apparel vendor launched in 1995, but five years ago changed its business model when Dabah realized that the traditional single-brand distribution to multiple retailers was losing traction.

"The proprietary brands business model identifies the white space within the retailers, and we figure out what the product should be [in that space]. Our first brand was Daisy Fuentes, which is hugely successful at Kohl's," said Dabah.

In addition to Fuentes, Regatta also designs and markets Simply Vera Vera Wang, Nicole Miller, Metro 7, Todd Smith and B Street for Charming Shoppes Inc. It is busy working on a new Karl Lagerfeld collection. Dabah declined to provide further details, but sources familiar with the plans said that the line is geared toward department store distribution at contemporary opening price points ranging from $50 to $250.Andy Postal, managing director at MMG, the investment banking firm that represented Li & Fung in the transaction, said, "It's a tremendous opportunity for Li & Fung to be a major contributor in the proprietary brand business, which is the next step in brand development in these major retail corporations today. It's really the best of both worlds because it provides exclusivity of the brand and, at the same time, creates tremendous margin opportunity for the retailer."

The back-end muscle that Li & Fung can provide to Regatta, and Regatta's brand management capabilities, now give Li & Fung the ability to develop its own brands for retailers and be a leader in the proprietary brand business, whether through acquisition or internal development.

"Our goal is to develop a platform for proprietary brands going forward over the next three years with innovative retailers," Darling said.

With the number of brands in the market that are up for sale, particularly those about to leave the Liz Claiborne Inc. and Jones Apparel Group portfolios, could Li & Fung be contemplating a brand acquisition?

"Our business model on brands is that we're very comfortable as a licensee, and not necessarily in owning brands. There are a number of incumbent companies that have built brands that they are divesting, but I don't want to speculate on where [they] might go," Darling said, but he also didn't rule out the possibility that there might be some interest in how some of those brands might be transformed into a proprietary line for retailers.

One manufacturing source familiar with the Liz Claiborne brands being shopped around said there are a few brands that are "household names." And with some tweaking, these brands have the potential to develop into proprietary lines that could fit into the Regatta business model.

In addition to Lagerfeld, Dabah said Regatta is about to launch more lines. He declined to disclose what they are, but said the timing of the transaction is perfect as Regatta can now leverage Li & Fung's financial resources and logistics capabilities. Dabah also believes there is a "window of opportunity" for Regatta to gain share as brands in the market are being shopped, sold and repositioned.Industry sources said the Metro 7, launched in 2005, and Daisy Fuentes lines each have a wholesale volume of $100 million, with Simply Vera expected to become a several-hundred- million-dollar business within the first few seasons.

A source familiar with the Regatta business model said it could take between six to nine months to pull together a brand concept from an idea to a complete lifestyle sample collection, at an investment cost of several million dollars, even before the idea is pitched to a particular retailer.

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