LIMITED EYES BREAKING INTO 3 UNITS

Byline: Valerie Seckler, with contributions from Sharon Edelson

NEW YORK — The Limited said Tuesday it is considering reconfiguring the company into three entities, a strategy which Wall Street analysts say could maximize the value of its stock.
Noting other objectives, Leslie H. Wexner, Limited chairman and chief executive officer, said Tuesday, “I see it as very stimulative to the businesses — a first step. I think we’ll find it easier to recruit individuals from outside the business.”
Executives in the newly formed smaller units would be motivated by enhanced potential to rise to the top as well as potential stock appreciation, Wexner explained.
The Limited said the timing of the plan depends on market conditions and the company would move on it as quickly as possible.
Initial public offerings for 10 to 15 percent of the stock in the two new businesses are expected to be made this fall, while one for the new Limited Inc. could happen in the next year or two, when its businesses are more mature, noted Todd Slater, analyst at UBS Securities. “Entrepreneurial people will be drawn to it,” Wexner continued, noting that a strong performance at Express, for instance, would wield a greater impact at a newly configured women’s unit than at the current Limited Inc. “Incentives have a strong operational effect. It will be great for building or acquiring new businesses.”
According to Wexner, the plan has been under consideration for two years. It involves:
Creating two new retail entities: the Victoria’s Secret Stores and Catalog, Cacique, Bath & Body Works, Penhaligon’s and Gryphon Development lingerie and personal care businesses, and the core Limited Stores, Lerner, Lane Bryant and Express women’s divisions. Each would be 85 to 90 percent owned by the new Limited, with the balance owned by public shareholders.
Structure, Abercrombie & Fitch Co., The Limited Too, Henri Bendel and Mast Industries, and acquisitions or startups, would continue to be wholly owned by The Limited Inc.
Seeking financial and marketing partners for its $1.5 billion credit card bank, in pursuit of growth opportunities. A majority interest in World Financial Network/Limited Credit Services may be sold to these partners.
Distributing cash resulting from these transactions to Limited shareholders. Wexner owns 74.9 million shares of Limited stock.
Peter Schaeffer, analyst at Dillon Read, is projecting the new core women’s business will generate net income of $184 million on sales of $4.4 billion this year. The lingerie/personal care unit should net $262 million on sales of $2.7 billion, while the new Limited Inc. will net $77 million on sales of $1.2 billion.
Financial analysts said the restructuring is likely to unlock hidden value in the company’s stock. “The sum of the pieces are worth more than the whole,” said Bear Stearns analyst Steven Kernkraut. “New businesses like Bath & Body Works are growing like a weed.”
“The stock’s been lackluster for the last few years,” Kernkraut said of the issue, which has ranged from roughly 22 to 17 in the last 18 months. “The stock performance will improve as operating performance improves.”
Wall Street rewarded Limited’s plan, sending the retailer’s stock up 2 1/8 to close at 22 1/8 Tuesday on the New York Stock Exchange, as 7,548,100 shares changed hands. Salomon Bros. analyst Elizabeth Ladd estimates a fair value for the two new entities plus Limited Inc. together at about $26 per share, with shareholders earning roughly $5 to $8 per share in dividends.
Addressing potential financial benefits of the plan, Wexner said, “I believe having smaller businesses will enable investors to better understand them. When we analyzed conglomerates like Melville and Edison Bros., we recognized that simpler companies consistently have higher [market] values.”
“What we saw over time is the phenomenon of a conglomerate discount,” Wexner added. “To some extent, I think that’s happening to Wal-Mart. Sam’s makes it harder to understand Wal-Mart.”
Kernkraut noted that in-vestors will be able to own “discrete, fast-growth businesses,” speaking of the new personal care unit and recast Limited Inc. “The market’s going to love it.”
Kernkraut observed that Express would be most critical to profits at the new core women’s business; Victoria’s Secret and Bath & Body Works would be most critical to the bottom line at the lingerie/personal care unit.
Meanwhile, Moody’s and Standard & Poor’s said Tuesday they are reviewing Limited’s long-term debt for possible downgrades. S&P said the move reflects concern that credit quality may be hurt by the retailer’s plans to sell a majority stake in its credit card business.
Looking ahead, Wall Street analysts foresee an eventual breakup of the new units, possibly via spinoffs. “I think it’s the beginning of an eventual breakup of the company into smaller, more ‘incentivized’ pieces for entrepreneurs,” said UBS’s Slater. “Smaller, more focused companies are the wave of the future.”
Told of the speculation, Wexner said, “I’m sure there will be a second step and steps beyond that, but we don’t know what they are. What if all the companies were made public? The question is one of timing and the maturity of the businesses.”
“I think The Limited’s a company that’s turned around,” said Kernkraut. “The plan is a blockbuster. Wexner’s historically wanted to keep control, and this reflects a new willingness to give some of that up because his women’s businesses have turned around and the timing is right.”
However, Schaeffer said, “I don’t know if it’s the right thing. I’d rather see them fix the women’s apparel business.
Schaeffer cited a need for fresh merchandising and a consolidation of store formats in the women’s business.
“I think it’s extremely smart,” said Bernard Manuel, chairman and chief executive officer of Cygne Design Inc., of The Limited’s announcement. “It gives them the means to maximize shareholder value by segmenting their businesses into categories. ”
— Fairchild News Service