WARNACO-DH DEAL SAID TO IRK CALVIN EXECS, BUT THE WEDDING IS STILL ON
Byline: Karyn Monget / With contributions from Lisa Lockwood and Sidney Rutberg
NEW YORK — Is there trouble in paradise?
Despite the prospect of a huge windfall for Calvin Klein if The Warnaco Group successfully acquires Designer Holdings and its Calvin Klein Jeans business, sources say Klein officials are “adamantly opposed” to what they see as a problematic union.
“It’s not a fait accompli,” said one source, indicating that the unhappiness of the Klein camp could create some additional hurdles, even though it would not be able to legally block a Warnaco/DH deal.
Warnaco said Wednesday that it had signed an agreement in principle to take over DH and its $470-million-a-year designer jeanswear business, operating under a 40-year license with Klein. The purchase agreement — which has been approved by the boards of both Warnaco and DH — is expected to be completed in December. The purchase price is $11 per DH share, all in Warnaco stock, for a total of around $354 million.
Officials at the Calvin Klein company have kept silent throughout the entire process this week. Asked for comment on the merger from the Calvin Klein company Thursday, a spokesman would only say that he had “passed messages on” to company officials.
Calvin Klein owns 1.28 million shares in Designer Holdings, which would bring him about $14 million in Warnaco stock if the deal goes through. The Klein organization already holds 1.7 million shares of Warnaco stock worth $58 million at current prices.
But despite the immediate payoff in a DH-Warnaco deal, Klein’s company is said to prefer the idea of its jeans business in the hands of a jeanswear expert such as a VF Corp., which manufactures and distributes jeans by Lee, Wrangler and Riders, or even the Frattini Group, which owns the Calvin Klein Jeans license for Europe and the Far East. Frattini, which produces other jeans lines as well, had an estimated volume of $117 million last year.
Sources say another concern at the Klein company is that the DH-Warnaco merger would place too much control — one-third of Klein’s $2.5 billion empire — into the hands of one executive: Linda J. Wachner, Warnaco’s president, chairman and chief executive officer.
Warnaco — which posted sales last year of $1.06 billion — already wields a big piece of Calvin Klein’s action with the designer’s underwear and accessories for men and women’s intimate apparel, a business it acquired in 1994. Warnaco’s Calvin Klein businesses are expected to hit $340 million this year, according to Wachner.
But can Calvin Klein throw a monkey wrench in the negotiations?
According to William Finkelstein, Warnaco’s senior vice president and chief financial officer, the answer is no.
“Calvin Klein has no veto rights. There’s no requirement to have CKI sign off on a bill,” Finkelstein said.
Yet another problem, according to some sources, is that the powerful Wachner and the highly entrepreneurial Arnold Simon, DH’s ceo, might find working together something of a challenge.
When asked if she and Simon — both of whom are used to calling the shots at their respective companies — have a problem getting along together, Wachner replied: “I don’t know why anybody would say we don’t get along — that’s totally ridiculous, totally off-the-wall.”
Wachner, at the Ritz Hotel in Paris, and Simon, at his offices here, were interviewed jointly in a conference call Thursday, regarding Calvin Klein’s reported disaffection for the deal.
Since the Calvin Klein company has maintained a stony silence regarding the merger, Simon was asked Thursday how the Klein company felt about the DH-Warnaco deal.
“I don’t work for Calvin Klein Inc…It’s something they will need to discuss,” snapped Simon. He also noted that his attorney, John Jones, “has been present at every call received from everyone pertaining to this deal.”
Regarding whether Simon has tried to cut a deal with any company other than Warnaco, Simon said, “I haven’t spoken to anyone else.”
“Linda and I both run large companies. Obviously, there are a lot of people who don’t want to see this deal happen,” Simon said.
Wachner interjected, “Just know this — Arnie is going to run this thing [the Klein jeans business]. He’s going to be president and ceo.”
Addressing concerns that Wachner would have too much control over the Calvin Klein operation worldwide, Wachner would only say: “I like them very much…I have enormous respect for Calvin and his associates. I have no comment on hearsay rumors or conjecture.”
Retail executives Thursday gave an affirmative nod to the proposed DH-Warnaco deal.
Michael Gould, chairman and chief executive officer of Bloomingdale’s, stated, “I think Linda is a great merchandiser. She is aggressive and understands how to do business, and she understands the balance of basics and fashion merchandising.
“Calvin Klein jeanswear business is only going to be successful if we have enough fashion in the line,” Gould said. “I am anxiously looking forward to Linda taking it over, so we can get the kind of results we’ve been anxious to see.”
Robert Pawlak, general merchandise manager at Milwaukee-based Carson Pirie Scott, said, “Linda always figures out the hot button to make it work. Her forte is in brand development, and Calvin Klein jeanswear will be another extension of that talent.”
It’s uncertain whether other parties are interested in acquiring DH, including VF Corp. — the huge jeanswear manufacturer which specializes in big breadwinners like the Lee, Wrangler and Riders names. VF officials would not comment.
One source, though, noted that “it wouldn’t be a good fit strategically for a company like VF.”
“VF derives its living by competing with Levi Strauss with the same kind of product, the Lee brand,” the source said. “When it comes to the bottom line, Calvin Klein’s business is not big enough, and it’s too specialized.”
VF’s jeanswear volume in 1996 came to $2.75 billion.
Meanwhile, there was little action in the stock of either company Thursday. Warnaco eased 5/8 to 34 1/8 while Designer Holdings gave up 1/8 to 9 7/8. The slight dip in Designer Holdings’ stock indicates that at least for the moment, Wall Street is not expecting a bidding war for the company.
Usually when the Street gets wind of possible new bidders, the stock of a buyout target will move above the offering price, which in this case is $11.
In other developments, Credit Suisse First Boston reduced its rating on Warnaco to “hold” from “buy,” noting that the acquisition of Designer Holdings “raises potential for more volatile long-term earnings performance.”
Analyst Dennis Rosenberg said in a research note that he was maintaining his 1997 estimate at $1.90 a share and his 1998 estimate at $2.28. Warnaco earned $1.51 last year.
Although the acquisition may add to Warnaco’s earnings in l998, “we believe that Calvin Klein Jeans represents a greater risk to Warnaco with less growth opportunities than the 1994 purchase of Calvin Klein intimate apparel,” Rosenberg said. “Calvin Klein Jeans is already a leading brand in the U.S. Therefore growth will be more dependent on planned product line extensions.” Rosenberg also noted that the denim market is much more volatile than the intimate apparel market, where Warnaco does the bulk of its business.
“While we are concerned about the longer term implications of the acquisition, there is a good chance that Designer Holdings will achieve the targeted earnings contribution in 1998,” Rosenberg said. “Designer Holdings is eliminating low margin specialty store distribution in 1997, which should contribute to an improved gross margin in 1998.”
Rosenberg estimates Designer Holdings will contribute $54 million to Warnaco’s 1998 operating income.
Warnaco will not increase the number of Calvin Klein outlet stores, as planned by Designer Holdings, eliminating startup costs. And Warnaco has identified $14 million worth of cost savings.