WARNACO IN THE WINGS AS TOMMY QUITS RACE TO BUY CALVIN KLEIN
Byline: Lisa Lockwood
NEW YORK — Tommy Hilfiger Corp., which negotiated intensely for three months to buy Calvin Klein Inc., is expected to officially inform shareholders by Friday that it has passed on a deal, sources said.
That leaves Linda Wachner’s Warnaco Group ready to pounce. In fact, Warnaco — producer of the lion’s share of Klein’s apparel business — factored prominently in Hilfiger’s decision to pull out, according to sources.
When Hilfiger came close to inking a deal for Klein, Wachner reportedly took an aggressive stance and drove up the bidding, competing with and possibly topping the $850 million Hilfiger was said to be proposing.
At the same time, Hilfiger approached Warnaco about buying its CK Calvin Klein jeans license, viewing the jeans business as an essential component of the Klein empire. But Wachner declined, unless Hilfiger was willing to pay what his negotiators reportedly considered an exorbitant amount: $1 billion. And such a deal with Warnaco would push Hilfiger’s total cost for the Klein acquisition to $1.85 billion.
One informed source told WWD that Wachner “basically stepped right in and she upped the ante. Linda Wachner is in there pushing and tugging to buy it.”
Early last week (page 1, March 27), WWD broke the news that Hilfiger negotiators had walked away from the deal because they couldn’t come to terms on price. Rumors began to circulate that Hilfiger executives made one last overture to Klein’s bankers on Monday to see if they could get the business at a price even lower than the initial offer, but later decided to make an official break.
Hilfiger’s board met in Montreal Wednesday to hear the results of an intensive study undertaken by its investment bankers Morgan Stanley Dean Witter about the Klein acquisition. According to sources, the decision was made at that time not to buy Calvin Klein.
Hilfiger officials couldn’t be reached for comment. Without referring to any specific company, a Calvin Klein spokesman said, “The process continues to move forward satisfactorily.”
Warnaco has reportedly directed its investment bankers to negotiate for the Calvin Klein business, despite what some view as the hefty price tag.
Officials at Warnaco Group declined to comment on what they characterized as market rumors.
Despite the debt such an acquisition would bring, sources say the $2.5 billion Calvin Klein business could be a strategic growth vehicle for Warnaco, which has had two straight years of earnings disappointments and a decline in its stock.
It’s no secret that Warnaco’s fortunes are very much tied to the Calvin Klein brand. According to Wall Street estimates, the CK jeans business, including outlet stores, will account for $700 million in wholesale volume this year, while the Calvin Klein Underwear business will generate another $350 million in revenues. In fact, one problem for Hilfiger was that buying Calvin Klein Inc. without owning the jeans license wouldn’t give enough value to shareholders, said one person close to the negotiations.
Also, without owning the jeans, Hilfiger would have to deal with Warnaco on distribution, advertising and other strategic issues. What if Wachner decided to sell the jeans to J.C. Penney, like she did the underwear? Although Wachner has emphatically stated in the past that she has no intention of doing so, apparently the licensing contract has many gray areas, and if she decided to take the jeans downscale, there would be little recourse. When Wachner decided to sell Calvin Klein Underwear to J.C. Penney late last year, it angered some of her other key accounts. Dillard’s, as reported, subsequently dropped the line, and the move has negatively affected other Calvin Klein licenses at Dillard’s. And May Co. cut back a significant chunk of the CK Underwear line, as well.
Sources said Klein was upset with Wachner’s decision to sell to Penney’s, especially in the midst of his negotiations to sell the company. One source said Klein was even thinking of pulling the company off the market at the time.
In February, Hilfiger hired Morgan Stanley Dean Witter to review “strategic and financial” options, including the possibility of an acquisition or repurchase of the company’s shares. Hilfiger directed Morgan Stanley to work exclusively on the Calvin Klein deal and had set a deadline of Friday, April 7, to make its final decision about the acquisition.
Last October, Lazard Freres was retained by Klein to explore strategic options for the company, whether an outright sale or joint venture. Several companies, including LVMH Moet Hennessy, Holding di Partecipazioni Industriali, Swatch and Jones Apparel Group, looked at the books, but only HdP came close to reaching a deal. HdP then decided to focus its energies on its publishing division.