WACHNER’S NEW DEAL: WARNACO BIDS $354M FOR CALVIN’S JEANS
Byline: Karyn Monget and Sidney Rutberg
NEW YORK — Nothing gets between Linda and her Calvins.
In a stunning coup that will give The Warnaco Group approximately one-third of the prolific $2.5 billion Calvin Klein machine worldwide — Linda J. Wachner, Warnaco’s president, chairman and chief executive officer, said Wednesday that it had reached an agreement in principle to take over Designer Holdings Ltd. and its $470 million-a-year Calvin Klein designer jeans business.
The purchase price will be $11 a share in Warnaco stock. Based on 32.2 million Designer Holdings shares outstanding, the transaction comes to around $354 million.
Following the announcement of the agreement, Designer Holdings shares moved up 5/8 to 10 and Warnaco added 13/16 to 34 3/4 on New York Stock Exchange. The $11 price will be based on the average price of Warnaco stock in the eight days prior to the closing.
Warnaco will not be putting up any cash for the deal and in fact will pick up a bundle of cash. As of June 30, Designer Holdings was sitting on a $63 million stack of cash.
Arnold Simon, president and chief executive officer of Designer Holdings, will continue as ceo of the Designer Holdings division of Warnaco. The Warnaco deal is worth about $100 million to Simon.
Wachner said that Simon would be available for comment after the deal is consummated, which is expected to be by early December.
Designer Holdings has a 40-year extendable license to develop, source and market sportswear under the Calvin Klein Jeans, CK/Calvin Klein Jeans and CK/Calvin Klein/Khakis labels. This license can be freely assigned, according to William Finkelstein, a director of Warnaco and senior vice president and chief financial officer.
In 1996, Calvin Klein earned $33 million in royalties from Designer Holdings based on sales of $466.7 million. If the license is transferred to Warnaco the royalty rate would remain the same, but higher sales would mean more money for Calvin.
Warnaco already has its own burgeoning business under the Calvin Klein label in men’s underwear, women’s intimate apparel and men’s accessories. In 1996, these businesses rang up $302.4 million.
In an interview Wednesday at the Warnaco headquarters here at 90 Park Avenue, Wachner, who was wearing what she called her “lucky” Calvin Klein pantsuit of black silk crepe, said she was “very tired but extremely pleased.”
Wachner — who is known for her tenacity as well as her ability to turn brands into huge money-making ventures — also believes in fast footwork. She masterminded three acquisitions last year: GJM, a Hong Kong-based private label maker of sleepwear and intimate apparel which produces a good deal of Calvin Klein innerwear; Lejaby/Euralis Group, maker of the upscale French foundations brand, LeJaby, and Bodyslimmers, a shapewear specialist. The company, which makes men’s wear as well as intimate apparel, pushed its sales over $1 billion last year for the first time to total $1.06 billion.
“I know Arnie Simon and he has done a tremendous job growing the business. Together we will be stronger and there will be a lot of savings,” Wachner said.
She added that the combination should save about $19 million a year and the bulk of the savings will be “non-people related.” The savings will come by combining two public companies into one with savings on leases, insurance and other duplicative services.
“For instance,” Wachner continued, “Designer Holdings pays about $2 million a year for factoring services. We have our own credit department and don’t need a factor.”
In the first year after the transaction, Wachner said, the merger will add 10 cents a share to Warnaco’s earnings.
“Calvin Klein [underwear, innerwear and men’s accessories] has been our best acquisition. We are thrilled at the opportunity to do this transaction — it will be very beneficial to our shareholders.
“I think we can grow this Calvin Klein brand of khakis, jeans and jeans-related sportswear enormously — 15 percent annually,” Wachner said, “and evidence of that is the Chaps by Ralph Lauren business, which has grown 10 times over the past 10 years.”
Warnaco’s licensed Chaps business of men’s sportswear generates annual wholesale sales of $250 million. About $25 million of that is comprised of bottoms.
New Rio L.L.C., a holding company owned by Charterhouse Bank and Simon, owns 51.3 percent of the stock in Designer holdings and has indicated that it would support the transaction. New Rio stands to receive about 5 million shares, worth $180 million, in Warnaco stock. As an exchange of stock transaction, it will be tax free for the sellers of Designer Holdings shares.
Simon currently owns 8.9 million shares of Designer Holdings.
Sources reported that there would be no “lockup” on the stock, so Simon and Charterhouse would have the right to sell as many shares as they he want, whenever they want to sell.
Warnaco acquired the Calvin Klein men’s underwear and accessories and women’s intimate apparel businesses in March 1994 and has vigorously pumped up the volume.
Under Wachner’s guidance, Warnaco’s Calvin Klein innerwear and accessories businesses are expected to climb to $340 million this year, Wachner said. Sales of Warnaco’s Calvin Klein lines — excluding jeans — leaped to $255.4 million in 1996 from $163.6 million in 1995 and are projected to hit $500 million in the next three years.
Wachner further noted that she plans to expand existing Calvin Klein jeans business in Canada, Mexico and Central America. A license in Canada, which will revert to Warnaco in two years, generates wholesale yearly revenues of $30 million; a sublicense, CK Calvin Klein children’s jeanswear does $70 million annually.
And while Wachner didn’t address questions about European distribution, sources indicated that she covets a Klein’s jeans business there. The European license is currently held by the Frattini Group, one of Italy’s largest jeans manufacturers.
The combined advertising budget for Calvin Klein jeans, intimate apparel and men’s underwear and accessories currently is over $30 million, she noted.
“We are spending $15 million for Calvin Klein underwear in 1997, and the budget will be higher next year,” Wachner added.
Wachner pointed out this is not the first time that she tried to buy DH.
“I tried in ’95 when they were interested in going public. I had to go away, because the price was too high,” she recalled.
Regarding discussions with Calvin Klein personally about the Warnaco-DH merger, Wachner said, “We really haven’t discussed it…I know we’ve always gotten high marks from Calvin. I have huge respect for him and his organization.” However, Wachner reportedly had lengthy discussions with Klein’s partner, Barry Schwartz, on Tuesday and the deal is believed to have his and Klein’s blessing.
Contacted Wednesday, a spokesman for the Calvin Klein officials said the company was “not ready to comment at this point,” regarding the merger.
Asked if she plans to take a piece of the jeanswear action away from specialists such as VF Corp. — whose stable includes the Lee, Wrangler and Riders labels — Wachner replied: “This is not a cola war. This is a specialized designer jeanswear collection. We are not trying to take away from anybody who has their own place and cachet.”
While the agreement, which has been approved by the boards of both companies, is still subject to various conditions, the support of the majority shareholder in Designer Holdings greatly improves the chances that the deal will go through. The deal requires approval of holders of 51 percent of Designer Holdings shares and holders of 51 percent of Warnaco shares. It is also subject to regulatory approvals.
In sharp contrast to Designer Holdings lackluster second quarter results, Warnaco came through with record earnings. In the quarter ended June 30.