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Tommy, Apax Chart Course

Tommy Hilfiger got an early Christmas present to the tune of $80 million after his company agreed to be sold to Apax Partners for $1.6 billion.

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NEW YORK — Tommy Hilfiger got an early Christmas present — to the tune of $80 million.

“I’m so excited. It was a long process to figure out what to do,” said a relieved Hilfiger Friday, the morning after his company agreed to be sold to Apax Partners, a global private equity firm, for $1.6 billion, or $16.80 per share in cash.

Hilfiger’s take is $80 million because he owns 5 percent of Tommy Hilfiger Corp., the $1.8 billion women’s, men’s and children’s diversified apparel firm.

Hilfiger said he signed a new lifetime contract with Apax and will stay on as a principal designer and chairman of the Strategy and Design Board. He said the new contract is “similar” to the one he had previously, under which he was paid between $14 million and $18 million a year. He also noted he will be an equity owner of the new business.

As part of the deal, David F. Dyer, chief executive officer of Hilfiger, will leave the firm after the deal closes, and Fred Gehring, ceo of Tommy Hilfiger Europe, will assume the leadership of the entire company.

“I think it’s a good deal for shareholders,” said Hilfiger. “I never wanted to put a number on it, because I didn’t want to have expectations to move us either way.”

John Megrue, co-ceo of Apax Partners, said that after a bidding process of several months, “We’re excited to be the winner.” He said he believes they reached a fair price and “shareholders got a fair deal.”

Megrue added, “It’s such a great brand; we’ve had tremendous experience in this sector.” Among Apax Partners’ retail and consumer investments are Phillips-Van Heusen, Tommy Bahama, Spyder Active Sports, The Children’s Place and Charlotte Russe. In December 2002, Apax made a $250 million equity investment and provided a loan of $125 million to PVH in connection with the Calvin Klein acquisition. Apax owns 38 percent of PVH.

“It’s clearly a business that can continue to grow globally,” continued Megrue. “The U.S. wholesale business we can turn around. It’s a matter of the management team, and Tommy and Fred [Gehring].”

Megrue said Apax doesn’t plan to come in and run Hilfiger’s firm, nor does it plan to turn it around quickly and sell it. “We find great management teams. We play a role as a board member. Fred Gehring has done a spectacular job on the European side of the business….There’s no clear exit plan at this point. We have a lot of exciting challenges.”

There had been ongoing rumors that Phillips-Van Heusen would be part of the Apax deal, but PVH said Friday that while it’s in preliminary discussions with Apax on how to work together with Hilfiger in the U.S., there is no agreement yet. Megrue said PVH was never a part of Apax’s bid. Sources said PVH could get involved with licensing some of the lines. “We know PVH well. They’re a great company and have a great management team,” said Megrue.

The Apax-Hilfiger deal is expected to close in spring 2006 and is subject to shareholder approval and other regulatory conditions. Hilfiger’s stock closed Friday at $16, unchanged from Thursday’s close on the New York Stock Exchange. Once the deal is consummated, Hilfiger will become a private company.

“I think the fact that we’ll be private will enable us to do the work needed to re-position the brand,” said Hilfiger. “It’ll give us the chance to be entrepreneurs again and be more creative in our approach.” Hilfiger said Karl Lagerfeld will remain as a division. “We’ve very excited about Karl’s business here and in the rest of the world.”

Reached in Amsterdam, Gehring said, “I’m very happy.” However, when asked to discuss the new deal and his future strategy, Gehring declined comment, noting all information about the deal would be coming out of New York. Gehring, who had submitted his own bid for Hilfiger in June that was rejected, has headed Hilfiger’s European operation since 1997, prior to which he ran Pepe Jeans for five years and was with Ralph Lauren in Europe for four years.

Hilfiger was happy to talk strategy.

“We’re going to upgrade the product and keep it in line with Europe, which has different positioning,” he said. “We want to reenergize the wholesale business in a more upscale way and open more of our own stores and really build a global brand.” Hilfiger noted that although the U.S. wholesale business has been challenged in recent years — wholesale volume was approximately $700 million last year, half of what it was in 1999 — the rest of the company has been on what he called “a great global growth path.”

Hilfiger Europe, which had sales last year of $532 million, expanded its wholesale business and opened stores in Zurich, Vienna and Milan this year. Several dozen European stores are planned for 2006 in Paris, Florence and other cities. The Far East has also been experiencing substantial growth. In mainland China, for instance, Hilfiger has opened 40 stores in 22 cities since 2002, along with 12 in Hong Kong since 1999. The stores are run in cooperation with Hong Kong’s Dickson Group, which also manages Hilfiger’s stores in Taiwan, Singapore and Malaysia.

Hilfiger noted that Apax, which was advised by Citigroup Corporate and Investment Banking and Credit Suisse First Boston, initially approached Hilfiger. The designer said he was never interested in selling to Wal-Mart, which had reportedly submitted a bid. “I want to build a premium brand,” he said. “That’s my direction and that’s my objective.”

But Hilfiger is not saying goodbye to department stores, and wants to create a brand they will embrace. He said the entire department store landscape has changed in the last several years as a result of so many mergers. “My belief is there are great department stores out there. I don’t want to be in the midst of price wars. I believe that with a premium brand, you won’t be affected by price wars.” In Europe, he said, his brand competes with Polo, Hugo Boss, Giorgio Armani and Miu Miu, and in jeans, his competitors are Diesel and Replay. “We’re positioned that way in the rest of the world. Even with freestanding stores, our neighbors [in Europe] are luxury designer brands. I believe we’re on the right track with our ad campaign and we’re reverting back to all-American designer with a twist. I don’t want to change that thought process. I want to evolve that.”

Asked whether he’ll have as much clout with the new Apax owners, Hilfiger replied, “I believe I will probably be as much a part of it as I’ve ever been. I really enjoy doing what I’m doing, and I haven’t reached the point where I want to retire and not dive into this. I really love it. I’m energized and excited about the future.”

Dyer, who was unavailable for comment Friday, issued a statement that said, “We believe this transaction is a validation of the brand and the global opportunities that lie ahead. Since 2003, we have been focused on improving operating performance and executing long-term plans to regain our position as a high-growth, high-return enterprise. We made considerable strides to this end, while understanding that there was still work ahead of us and that our progress to date put us in a strong position to consider other ways to unlock the value of our brand and franchise.”

Last August, Hilfiger retained J. P. Morgan Securities Inc. to review strategic alternatives, including recapitalizations, restructurings, share buybacks and other measures to create value, including a possible sale of the company.

“As part of this effort,” said Dyer, “the board undertook a wide-ranging auction process, ultimately resulting in the unanimous determination by the company’s independent directors that the offer from Apax Partners was in the best interest of the company and our shareholders.”

Licensees appeared to be pleased with the deal.

Dan Brestle, chief operating officer of Estée Lauder Cos., Hilfiger’s beauty licensee, welcomed the news of the deal Friday, especially when told of the new owner’s intention to put the Hilfiger fashion brand on a more luxurious footing. “We need a healthy North American ready-to-wear business,” Brestle said. “The better that is, the better it will be for the North American fragrance business.” Hilfiger’s fragrances generate about $120 million a year at wholesale.

The state of Hilfiger’s fashion fortunes has been a topic of keen interest at Lauder almost since the licensing deal was signed with the designer in 1993. While the first masterbrand, Tommy, was a blockbuster success in 1995, recent launches have not achieved the volume of business done by that initial offering. Lauder executives do not give sales projections, but industry sources estimate the size of Hilfiger’s global fragrance business at $200 million retail, or $120 million wholesale. During an interview in January 2004, Patrick Bousquet-Chavanne, a group president at Lauder, candidly discussed the brand’s challenges.

“The Tommy Hilfiger Toiletries division has seen a rocky road over the last few years,” he said, adding that the brand needs “a new energy” to reclaim its old footing in department stores.

That new energy came out of the celebrity market. Lauder shifted gears by aligning the Hilfiger brand with pop stars acting as spokespeople. Lauder’s Designer Fragrances Division recruited Beyoncé Knowles and Enrique Iglesias to help market Tommy Hilfiger Toiletries’ True Star from Tommy Hilfiger. Knowles introduced the efforts with a True Star women’s fragrance in the fall of 2004. Since then, Lauder has built the fragrance into a masterbrand that now includes two women’s fragrances, True Star and True Star Gold, and a men’s scent.

“We believe that aligning the renewed fashion strength of Tommy Hilfiger [with Knowles’ participation] will result in increased energy for the fragrance franchise,” Bousquet-Chavanne added in the earlier interview. “We still own a substantial equity in the men’s and women’s fragrance world, and this project is our way of reengaging the consumer with a truly global fragrance concept. We believe this is a groundbreaking moment for this division.”

Referring to the latest addition of True Star Gold, which bowed in December, Fabrice Weber, president of Aramis and Designer Fragrances, said,: “This brand is an evolution of Tommy’s franchise, and music has always played a major part in that,” adding that “high-profile and multifaceted talents” give the brand a strong platform on which to build.

Industry consultants surveyed also saw potential in the Apax-Hilfiger agreement.

Allen Ellinger, senior managing director of Marketing Management Group, a consulting firm here, said he believes this deal is a positive one for both Hilfiger and Apax. “Apax is in this for the long haul,” he said. “I believe they have what it takes to breathe new life into the Tommy Hilfiger brand, which really is one of the best-known brands in the world. It has the ability to be reenergized. Sometimes all it takes is a new owner.”

Ellinger said that to bring the Hilfiger brand to life again, Apax should concentrate on the consistency of the products it sells. “Over the past five or six years, the brand has been looking for a new point of view and in the process, lost its focus,” he said. “They need to focus on a specific point of view, whatever that may be.”

Laurence C. Leeds Jr., chairman of Buckingham Capital Management, said, “I think there’s a lot to be done with the Tommy business. In Europe, it’s very strong. The brand has enormous growth ahead of it in Asia, and it still has a lot of potential in this country. I think the product hasn’t been right, but if the product is made right, it has shown strong brand recognition, especially in the younger segment of the market.”

Leeds was hoping that PVH would have a piece of the action. “PVH’s expertise would be a good asset. My expectation was that PVH would be involved.”

“They used to be a power brand, but for the past few years they’ve been headed in the wrong direction,” said Marshal Cohen, chief industry analyst at market researcher NPD Group. “This new opportunity will give the company a chance to step back and regain the control they once had.”

Cohen said that Apax will do the brand some good, a much better choice than Wal-Mart would have been. “Wal-Mart would have been the kiss of death for the brand,” he said. “What other retailer would carry a brand that was being sold at Wal-Mart? Apax is better for them and I think there will be a lot of good to come from this deal.”

In its most recent fiscal year, ended March 31, Tommy Hilfiger Corp.’s net income fell 34.5 percent to $85.7 million from $130.8 million on a sales decline of 5.3 percent to $1.78 billion from $1.88 billion.

On Friday, Hilfiger released its second-quarter figures for the period ended Sept. 30. Net income declined 8.8 percent to $54.9 million, while net revenues were off 6.1 percent to $501.8 million. Its U.S. wholesale business continued to erode in the quarter with revenues down 36.9 percent to $119.3 million from $189 million in the year-ago quarter. International revenues, however, increased 10.2 percent to $215.3 million from $195.4 million in the year-ago quarter.

As of Dec. 23, the company’s market capitalization stood at $1.47 billion. The stock’s 52-week high was $18.76, and the low was $9.57. Shares had been trading around $14, but jumped to the $18 range in August when WWD first reported the company was for sale.

With contributions from Pete Born and Julee Greenberg

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