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Do your homework.
This story first appeared in the April 7, 2011 issue of WWD. Subscribe Today.
That’s the advice from Phillips-Van Heusen Corp.’s Emanuel Chirico for anyone contemplating a merger or acquisition.
He should know. Since joining PVH in 1993 as controller, Chirico, now the firm’s chairman and chief executive officer, has been involved in at least eight acquisitions.
Chirico was the keynote speaker in the afternoon session at the Fairchild Men’s Wear Industry CEO Summit at the Mandarin Oriental hotel in New York on March 29. He spoke the day after PVH posted fourth-quarter results that beat analysts’ estimates by 11 cents and said it expects 2011 revenues to come in at least at $5.58 billion.
Prior to the presentation, Chirico told WWD that his thoughts regarding acquisitions don’t center on the size of deals but instead on the growth opportunities they present.
On whether new deals need to be huge ones to move the needle, he said, “If acquisitions are part of your strategy, then you need a strategy to it. I don’t want a hodgepodge of stuff.”
Chirico told attendees during the presentation that if a transaction doesn’t make PVH a better company, then PVH should probably be “buying its own stock back.”
He discussed four acquisitions. Izod and Superba were “bolt-on” deals that expanded the distribution or product categories of a brand. Calvin Klein and Tommy Hilfiger were “transformational” transactions that changed the business of the parent.
Crystal Brands Inc. was in bankruptcy when PVH bought its Izod and Gant businesses in 1995. The main opposition was management, which wanted to do its own deal. No surprise that due diligence and access to management were limited. Izod had $200 million in global retail sales, while Gant’s were $300 million.
Because Crystal was teetering on bankruptcy for some years, there were major operational problems, from quality control to cancellations of goods, that PVH didn’t learn about due to lack of access to information. Chirico said for the first two years after the acquisition, those issues led to PVH missing earnings projections by 50 percent on the acquisition, and post acquisition for two years PVH missed financial results on a consolidated basis that it had guided to Wall Street.
“It was not a pretty picture, and then overnight we got really smart,” he said candidly.
PVH sold Gant for $100 million, and the Izod business started turning around. Today, Izod does $1 billion in global retail sales.
“The lesson here is the need to do due diligence. Though we understood the business and its operations, postacquisition there are always positive and negative surprises,” Chirico said.
An exclusive sale, and PVH’s long relationship with the neckwear firm gave it unfettered access to the company’s financial and operational information. It also built in a potentially lucrative earn-out for Superba’s senior management, which agreed to stay for a three-year period.
Acquired for $105 million in early 2007, Superba had sales of $110 million four years ago and is now a $200 million business. It gave PVH significant revenue and expense cost synergies with its current tie businesses.
Chirico cautioned attendees to be careful with earn-outs because, although they incentivize management, they can occasionally confuse decision-making authority. It wasn’t an issue for PVH since both management teams agreed on the future strategy for Superba.
“The moral of the story here is to move quickly and buy what you know,” Chirico said.
“This was a major transaction for us. We broke a lot of our own M&A rules here,” Chirico said.
The sale was a full competitive auction, with limited information, a high purchase price and high leverage. The $700 million deal, closed in 2003, consisted of $425 million in cash and $275 million in an earn-out. PVH’s market capitalization at the time was $300 million. To complete the deal, it reached out to private equity firm Apax Partners, giving it a 38 percent ownership stake in PVH.
Calvin had $2.5 billion in global retail sales and a $100 million licensing business. Seven years later, its management team is still running the show.
“We did not Van Heusen-ize Calvin Klein,” Chirico boasted.
Calvin “significantly exceeded all of our financial expectations,” Chirico said. The operation has helped PVH report record revenue and earnings for five years. PVH paid down the debt and took out the private equity investment in two-and-a-half years. Calvin is now a business with more than $6.6 billion in global retail sales.
“Great brands are expensive. It’s OK to pay huge premiums for a great brand, but make sure you’re actually buying a great brand,” Chirico emphasized.
PVH and Apax, Hilfiger’s parent, were in talks about Tommy and other opportunities. PVH had total access to the business, and it invited Tommy’s team to spend time with PVH in the U.S. in what Chirico described as a “reverse due diligence” process.
“A major selling point with Tommy was how we handled the Calvin Klein transaction and the fact that we didn’t Van Heusen-ize it,” Chirico explained.
PVH’s attraction to Tommy was its international operational platform, which the apparel giant felt would enhance the core competencies of both companies.
“It was a big deal,” Chirico said of the 2010 transaction. “Over $3 billion. We took on $2 billion of new debt. We were highly leveraged again.…We were doing an acquisition that was almost the same size as we were. [Tommy] has $2.5 billion in revenue, generating $380 million in EBITDA [earnings before interest, taxes, depreciation and amortization].”
Apax was brought in as an investor again, this time holding just a 12 percent stake in PVH.
The firm is quickly deleveraging: It paid down $450 million and will pay down another $300 million this year.
Noting Tommy’s excellent growth prospects, Chirico ended his remarks somewhat colloquially: “The moral of the story is: so far, so good — or this better work because my ass is on the line.”