AZRIA TAKES A STAKE IN ALGO

Byline: Arnold J. Karr / Kristi Ellis

NEW YORK — Algo Group and AZ3/BCBG Max Azria have penned their own version of the North American Free Trade Agreement.
Once consummated, the deal will make Algo the licensee for BCBG Max Azria and two other labels owned by his privately held company, and involve BCBG substantially in Algo’s business south of the Canadian border and into Mexico.
Montreal-based Algo and Los Angeles-based AZ3/BCBG Max Azria have signed a letter of intent under which Azria, president of AZ3, will become a “significant” minority shareholder and a director of Algo, according to a statement released jointly by the two firms on Friday.
Azria’s stake will not involve a cash exchange and the exact stake is subject to the execution of a share purchase agreement. Neither Azria nor Raoul Heredia, Algo’s president and chief executive, would provide estimates of Azria’s stake.
Working to recover from two years of steep losses and now with a majority of its equity in the hands of Dan Elituv, Algo will become the Canadian licensee for all apparel, accessories and footwear under the BCBG Max Azria brand, as well as the Parallel contemporary and To The Max junior labels owned by the Los Angeles company. While the BCBG label would continue to be manufactured under the auspices of Azria’s company, Algo would be actively involved in manufacturing, as well as selling and distributing the Parallel and To The Max labels for the Canadian market and elsewhere, Heredia told WWD.
The licensing agreement does not include Azria’s couture/deluxe designer ready-to-wear label, Herve Leger, acquired by AZ3 in 1998. Leger left the company the following year.
Meanwhile, Azria would become “a leading force in strengthening the commercialization and distribution of all labels produced by Algo Group through Canada, the United States and Mexico,” Heredia said in a statement. Heredia noted that Algo’s involvement with Azria and his company will allow it to add a significant moderate component to its contemporary business.
In addition to the share purchase agreement, the deal is subject to approval by Algo’s board, the Toronto Stock Exchange and regulatory authorities. Heredia said terms should be set and the deal closed within 45 days.
The preliminary agreement is a significant step in the rebuilding of Algo, which has seen its sales slump and earnings evaporate in recent years. Last year, the company had a net loss of $7.1 million on sales of $114.1 million, as weakness in the Canadian retail market forced it to undertake significant restructuring and the elimination of several unprofitable businesses. Although the net loss was trimmed 32.3 percent from the prior year, sales were down 12.5 percent from 1998 and off 26.4 percent from 1995. (Dollar figures have been converted from Canadian dollars at current exchange. )
Although a major player in Canada since being founded in 1942, Algo has seen not only a significant portion, but the majority of its revenues shift to U.S. customers since the adoption of NAFTA in 1993. In 1999, the U.S. accounted for approximately 53 percent of sales, or $60.4 million, versus 47 percent, or $53.7 million in its home market.
The Canadian company has also streamlined its product offerings and reorganized them into four distinct groups. Although best known for its dresses, the ladies’ fashion apparel unit which contains them accounted for 41 percent of sales last year, followed by children’s outerwear (23 percent), fashion fabrics (19 percent) and sportswear (17 percent).
Although a significant portion of its business consists of merchandise manufactured under license from other companies, Algo has taken a more aggressive stance towards developing brand programs of its own in the last two years, partially as a reaction to weakness in private label programs with several Canadian retailers.
The ladies’ unit does business under labels including Algo, Lori-Ann, En Francais, A Line and Alfred Sung. In addition to licenses including those covering the Mudd and Bugle Boy labels in Canada, the sportswear unit includes Green Jeans, a private label denim line, and LondonBlues, an Internet-based girls’ jeanswear line.
Reached by phone in Milan, Azria told WWD that the agreement could elevate Algo’s U.S. sales to 75 percent of its total and also boost his company’s business in Canada to 10 percent of revenues from its current level of 3 percent.
Azria will be responsible for expanding Algo’s missy, denim and outerwear business in the U.S. and Mexico. He said that he will be in charge of product and marketing for Algo. “I will bring fresh blood, a new direction and a more modern approach to their business,” he said. “This partnership will help me be extremely strong and deep in Canada.”
BCBG currently has seven stores in Canada and will open four more next year, Azria said.
“The Canadian market is difficult, but Algo is a 60-year-old company that has a great team,” Azria said.
AZ3 is expected to hit $350 million in worldwide volume this year and could hit $450 million next year, Azria said.
Azria has slowly been building an empire. Just a month ago, he announced that he would take over the Giorgio Beverly Hills retail operation on Rodeo Drive and produce all of its merchandise under the label.
He said that he might also pursue opening a chain of Algo stores in Canada, which would distribute its own products, in the next few years.
In a prepared statement, Azria noted: “A successful business needs to have a global presence, but expanding globally also involves building partnerships with companies that have a strong hold on particular markets. This partnership with Algo Group will create a powerful synergy that will result in much stronger manufacturing, sales and distribution of all the label involved in the respective territories.”
Elituv, who acquired a controlling interest in Algo of 55 percent after making a $3.8 million equity investment, said: “Max Azria has built one of the most successful global franchises in the fashion world and our connection to him makes us a player on the international stage. Max Azria is a visionary and an astute businessman. We are privileged to join forces with him.”
Concurrent with the announcement of the alliance with Azria, Algo said that Elituv had been added to its board of directors and that Louis Newman had resigned from the board. Henry Winterstern, a director of the company since 1997, was appointed vice chairman, a post that had been vacant for two years.
Elituv’s investment in Algo was agreed to in August at the same time that the company signed a commitment letter for a $60 million credit facility with GMAC Credit Corp. Canada.
At that time, Heredia noted that Elituv “brings a unique marketing vision to all his operations and has a strong track record of developing successful business partnerships.” Friday’s announcement appeared to demonstrate the scope of that vision.
As Azria commented on Friday, “The music has just started and now we have to dance.”

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