HILFIGER TO BUY EURO LICENSE, REVENUES EXPECTED TO SOAR
Byline: Lisa Lockwood / With contributions from Evan Clark
NEW YORK — To maximize growth opportunities, Tommy Hilfiger Corp. will take direct control of its European business.
The $1.9 billion apparel firm Friday announced it had signed a definitive agreement to acquire all the outstanding shares of its European licensee, T.H. International NV, for $200 million in cash.
T.H. International’s principal operating subsidiary is Tommy Hilfiger Europe BV, (and its subsidiary, Tommy Europe) and is based in Amsterdam. For the fiscal year ended March 31, Tommy Europe reported revenues of $102 million. Its revenues are expected to increase 47 percent, to $151 million, for the fiscal year ending March 31, 2002.
Tommy Europe is controlled by Apparel International Holdings Ltd., whose owners are Hilfiger Corp.’s two co-chairmen, Silas Chou and Lawrence Stroll; Joel Horowitz, its chief executive officer, and Tommy Hilfiger himself. AIHL owns 92 percent of Tommy Europe, while Tommy Europe management and other minority shareholders own 8 percent. Because of Tommy Europe’s ownership, a special committee of independent directors, advised by independent legal and financial advisers, was established to review and negotiate the transaction. Frank Gehring is president and ceo of Tommy Europe, and the company said the management is expected to remain in place.
Under the terms of the transaction, Hilfiger also will assume about $30 million in short-term debt of Tommy Europe. The deal is being funded using available cash and is expected to add an aggregate of 4 to 6 cents to the company’s earnings per share in the last three quarters of the current fiscal year ending March 31, 2002. The acquisition is expected to be completed this month.
Investors approved of the deal and drove the price of Hilfiger’s shares up 65 cents, or 4.9 percent, to close at $14 on the New York Stock Exchange Friday.
Europe is Hilfiger’s largest overseas market in terms of sales and distribution. Tommy Europe markets and distributes Hilfiger’s women’s, men’s and children’s sportswear and jeanswear to more than 20 countries throughout Europe and the Mideast under license from the company. It currently has 3,000 points of distribution.
Chou, co-chairman of Hilfiger, said in a statement: “This acquisition combines our fastest-growing and largest geographic licensee with our North American business and adds a new and natural growth vehicle for the years to come, as the Tommy Hilfiger brand continues its development as a global lifestyle brand.”
Horowitz spoke to analysts Friday morning in a conference call from the British Virgin Islands, where the company held its annual meeting. He was traveling back in the afternoon and couldn’t be reached. However, in a statement, he said: “This is clearly the right time for us to maximize the growth opportunities of Tommy Europe for our shareholders by bringing it in-house. Our goal is to leverage its existing multichannel and pan-European operating platform to further expand across Europe.”
Horowitz said he believes Tommy Europe can generate in excess of $250 million within the next several years. In addition, he said the company plans to accelerate the rollout of licensed products in Europe using Tommy Europe as its foundation.
In 1998, Hilfiger successfully integrated two of its licensees, Pepe Jeans and Hilfiger Canada, into the parent company. Horowitz stated he believes that the company’s distribution, logistics, production and financials will help Tommy Europe develop a support structure to achieve faster growth.
Buying European licenses or businesses is becoming an increasingly popular strategy among American designers.
Last year, Polo Ralph Lauren Corp. completed its deal to acquire its European licensee, Poloco SAS, which held European licenses to sell men’s and boy’s Polo apparel, women’s and men’s Polo Jeans and certain Polo accessories. Poloco and the acquired affiliates had revenues of about $180 million for 1998.
And last week, Calvin Klein struck a deal to buy back control of his signature women’s collection from the Mariella Burani Fashion Group in Milan.
Analysts seemed encouraged by Hilfiger’s acquisition.
Dennis Rosenberg, an analyst with Credit Suisse First Boston, told WWD: “Strategically, it was something they needed to do to revitalize growth.”
The European business, he said, “is in the early stages of growth, they have turned the corner in terms of profitability and [this comes] at a time when the U.S. business has pretty much matured, except for women’s.”
Rosenberg, who has a “strong buy” rating on Hilfiger, said the acquisition will help its share price over the next few years with revenue growth of about 47 percent this year and 30 to 35 percent for the next two years. “That should translate into much higher bottom-line growth because most of the [selling, general and administrative expense] is fixed.”
A.G. Edwards & Sons analyst Mitch Kummetz added: “It’s been a transaction that we thought would be a good one for a while. It might have been better had they done it a year ago. Obviously, Europe is an underdeveloped marketplace for them.
“I like the deal, but I still have some concerns. I think their men’s business is still in trouble. If you look at retail in general, I think that [men’s] continues to be the more difficult area of retail,” said Kummetz.
Despite that difficulty, he noted, this wasn’t a deal born out of necessity. “It clearly helps their growth story, but there are other avenues of growth they could work on” such as the women’s business and retail expansion.
As for the price tag, there were some rumblings on Wall Street, but nothing serious. “The price is a little high, but it’s accretive in 2002, so you can’t really argue,” said Kummetz, who also noted, “they didn’t exactly underpay for it.”
As part of the transaction, the company said that Horowitz and Hilfiger himself have each agreed to waive any additional compensation attributable to the net sales and operating earnings of Tommy Europe, to which they might otherwise be contractually entitled under their existing employment arrangements.
The company also said that in order to maintain the strength of its balance sheet and financial flexibility, the board has terminated the remaining portion of the company’s $150 million share repurchase program approved in April 2000. No shares have been acquired under the program since May 24, 2001, at which time it was announced that the company had purchased an aggregate of 6.2 million shares.
While the Tommy Europe lines are marketed throughout Europe, they are designed in the U.S. The collections are similar to the American ones, but feature the red, white and blue flag, rather than the signature crest. Both insignias were initially introduced in Europe, but the flag performed much better, said a Hilfiger spokesman.
Hilfiger launched men’s sportswear in Europe in 1997, followed by women’s and men’s denim 21 months ago. His women’s sportswear, children’s wear and Hilfiger Athletic lines were introduced in Europe in limited distribution last fall and were rolled out this spring.
In an interview with Gehring in March, he said Tommy Europe planned major expansion through both its wholesale and retail operation. Showrooms were operating in Amsterdam, Dusseldorf, Munich, Zurich, Salzburg, Paris, Madrid and London. Hilfiger also has signed distribution agreements in Italy, Turkey, Greece, Portugal and Norway, and each of the distributors has opened a local showroom.