FTL SHIFTS: A CALL FOR BUYERS?

Byline: Karyn Monget / Thomas Cunningham

NEW YORK — William Farley’s resignation Monday as chairman and chief executive officer of apparel powerhouse Fruit of the Loom was a surprise to industry executives and renewed speculation that the company could be a target of a merger or acquisition.
An announcement from FTL’s Chicago headquarters Monday described Farley’s departure as “the formation of an office of the chairman,” whose members will include Farley, as well as Sir Brian Wolfson and Dennis Bookshester, both members of the board. Bookshester has been a director since 1992 and was a former vice chairman of retailer Carson Pirie Scott.
FTL said it is immediately looking for a permanent ceo and chief operating officer, which was apparently the desire of the firm’s lenders.
Farley is known and respected as a dedicated, hands-on top executive who actively managed all levels of FTL business in a powerful, all-encompassing job. But some observers said his approach could have impeded a deal or a search for a successor.
There are about a handful of potential suitors big enough to make such a buy, including VF, Sara Lee Corp., The Warnaco Group and its sister company Authentic Fitness, Wacoal Japan and its U.S. subsidiary, Wacoal America, and possibly mid-sized Jockey International, which shares the same core-product base as FTL of men’s and boys’ underwear.
Officials at FTL did not return phone calls. A spokeswoman at FTL’s general offices in Bowling Green, Ky., said Tuesday that Farley and Bookshester were “in meetings all day.”
Last May, Farley told WWD in an interview following FTL’s annual meeting that the firm was not engaged in current discussions to sell the company. However, he added, “That doesn’t mean we wouldn’t.” The asking price was $2 billion, according to sources.
It’s been no secret that FTL has had its share of financial problems over the past year. Plagued by inventory shortfalls, FTL reported a second-quarter loss July 3 of $2.3 million compared with earnings of $65.3 million, or 90 cents a diluted share. Results were well below Wall Street expectations of 3 cents a share. Sales for the quarter fell 12.1 percent to $551.7 million from $628 million. Sales were even lower than FTL indicated they would be in June, when it warned analysts of lower earnings and predicted sales of between $570 million and $590 million. At that time, analysts were expecting the company would earn 49 cents a share.
In the half, FTL reported a loss of $11.3 million against earnings of $96.5 million. Sales dropped 11.5 percent to $960.4 million from $1.09 billion.
As reported, the basic family apparel company closed four plants in last year’s fourth quarter to reduce inventory and aggressively cut costs, which became a cause of major concern for Wall Street analysts. The product shortfall also was incurred by the consolidation of U.S. knitting operations.
In the year ended Jan. 2, 1999, FTL annual wholesale revenues of $2.17 billion compared to overall sales of $2.14 billion in 1997 and $2.45 billion in 1996.
In March, Fruit of the Loom Inc. became an offshore corporation after it had become a subsidiary of Fruit of the Loom Ltd., a Cayman Islands holding company. Each share of its class A stock was converted into one class A ordinary share of Fruit of the Loom Ltd. The move was widely seen by Wall Street as a way to make the company more attractive for a buyer.
The Fruit of the Loom label is literally a household name. In the 1997 Fairchild 100 survey of most-recognized fashion brands, Fruit of the Loom ranked 14th out of 100.
It is unclear whether FTL’s portfolio of brands — which in addition to Fruit of the Loom men’s and boys’ underwear, fleecewear and children’s wear, as well as Fruit Intimates and FTL Sport for women, includes Gitano jeans for women and the licensed Pro Player men’s activewear label — are strong enough to attract a package deal.
Another gray area is whether buyers would be interested in what some have called FTL’s “excess baggage” of machinery and plants, especially since the bulk of production is anchored in basic knits, a category many manufacturers regard as a maintenance business — not a growth sector.
Linda J. Wachner, chairman and ceo of Warnaco, could not be reached for comment Tuesday. But Wachner is no stranger to doing business with FTL. The company has had a licensing agreement since 1991 with Warnaco to produce moderate-price bras and daywear bearing the Fruit of the Loom label for distribution to mass merchants, including Wal-Mart and Kmart. The license was renewed in 1998. Wholesale sales in 1997 of Fruit of the Loom bras done for the mass market were $46 million.
One source at a publicly owned apparel company noted, “The problem has been that nobody wants to be involved in a vertical company. It’s a money loser today. All of the major corporations went in and did due diligence. But they passed. There’s got to be a clear signal that FTL could produce a very high turnaround.”
Two companies said they are not interested in any form of acquisition of FTL: Wacoal and Jockey. Richard Murray, president of Japanese-owned Wacoal America, said, “Japanese companies have more of an agricultural mentality when it comes to business. They like to grow and nurture. The American approach in purchasing is not to slowly grow a business.
“It looks to me like FTL is not interested in a five- or six-year plan. A merger is probably the only way they can get the immediate satisfaction their shareholders want right now,” said Murray.
Ed Emma, president and chief operating officer of Jockey, noted, “I think the real variable here is who ends up running the company. It’s going to be interesting to see what happens, because the impact of another merger might be fairly traumatic in the market place.
“We’re not interested in FTL. It’s a very large company, and besides, we sell to department stores. Fruit is a low-cost producer in discount channels.”
The other question being asked by executives is why Farley — who owns 1.8 million FTL shares and has held the post of chairman, chief operating officer and ceo since acquiring FTL in a leveraged buyout in 1985 — would relinquish a post he reportedly loved.
Observers familiar with FTL’s internal structure noted that Farley was at times overzealous in exercising his control over many facets of the company. That factor may have impeded an ongoing search for upper senior management executives, especially an executive vice president.
Ellen Rohde, president of the Vanity Fair Intimates coalition of VF Corp., said, “My impression was that Mr. Farley was very, very involved in actively managing the business, and based on the lack of performance at Fruit, he thought that perhaps it was time for someone else to come in and get the business moving in the right direction.”
One source from a Fortune 500 company who knows Farley and did not want to be identified, said, “Maybe his resignation will improve FTL’s recruiting of senior executives. Everybody knew that they wouldn’t have been able to do anything as long as he was in charge.”
Fruit of the Loom’s bankers likely instigated Farley’s resignation because of the company’s deteriorating financial position, according to debt and equity analysts.
“I strongly doubt that any other stakeholder in the situation other than the bank would have had the leverage to effect this change,” said Ira Taub, a high-yield debt analyst at Bear, Stearns.
The decision to seek a new chief executive and operating officer was likely a good one, according to Dennis S. Rosenburg, analyst at Credit Suisse First Boston.
Rosenburg, who rates the stock a “hold,” said that FTL has been consistently missing estimates for the last year, mainly because of production problems. Earlier it suffered from shortages of fabric, and more recently FTL has had difficulty with its product mix, he noted.
Several equity analysts agreed with Taub’s assessment that FTL’s lenders pressured Farley to resign while renegotiating the company’s credit agreement in July. The bankers are generally first to punish a company for failing to reach its targeted results in part because they usually see the company’s results earlier, Taub said.
Under the renegotiated agreement, effective July 20, FTL gave its banks liens on substantially all its assets and agreed to pay a higher interest rate on loans, according to a recent filing with the Securities and Exchange Commission. Bank of America heads the banking group.
In the filing, FTL indicated that it could not be sure how long it would continue to be in compliance with its financial covenants and that it may not have sufficient funds to pay off all its debts should it default on its debt.
At the end of June, FTL had $250 million outstanding under its revolving line of credit and about $65 million in term loans, Taub said. Although FTL’s cash flow is constrained, it is not near bankruptcy, Taub noted.
“If you define serious trouble as a situation where the company has to throw out its chairman in order to provide confidence to its bankers to get liquidity, then they’re in trouble,” Taub said. “I don’t want to be the guy to predict the demise of Fruit of the Loom, but I would find it hard to argue that it’s not a possibility.”
Taub said FTL’s heavy debt load makes an outright sale unlikely. Including the value of its debt and equity, the company would have to sell for about $1.8 billion, or 10 times earnings before interest, taxes, depreciation and amortization, Taub said. However, most buyers would only be willing to pay about six times EBITDA for a publicly traded apparel company, Taub noted.
Shares of FTL dropped 1/8 to 7 Tuesday on the New York Stock Exchange. After the market closed, Standard & Poor’s placed FTL’s debt on credit watch, with negative implications. FTL had approximately $1.26 billion of debt as of July 3.

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