At first blush, Sun Capital Securities Group LLC’s unsolicited $543 million bid for Kellwood Co. may seem low. But, considering the $1.96 billion vendor’s troubled earnings in the last few years, analysts think the $21 a share offer may not be such a bad deal.

Kellwood released a statement close to midnight Tuesday saying it had received “an unsolicited letter” from Sun Capital. On Wednesday, the apparel group’s stock jumped 26 percent to close at $19.14. Shares of Kellwood have been trading around $15, near their 52-week low.

This story first appeared in the September 20, 2007 issue of WWD. Subscribe Today.

Some observers balked at the idea that brands such as Vince, Gerber, Hanna Anderssen, Baby Phat, Smart Shirts and American Recreation couldn’t demand more than $21 a share.

“Based on historical trading ranges and the fact that the bulk of the shareholders got in at higher prices than the bid price, this looks like a real low-ball bid,” said consultant Paul Charron, former chairman and chief executive of Kellwood rival Liz Claiborne Inc. “I can’t imagine the board would recommend shareholder approval of a bid in this range, even with the challenges that face Kellwood and all the other companies in the sector.”

Charron called Sun’s offer an opportunistic bid, but analysts pointed out that shareholders who bought when the price was around $30 a share probably no longer hold the stock. Those analysts questioned how the rest of Kellwood’s portfolio — filled with struggling moderate brands such as Sag Harbor, Koret and Briggs New York, as well as nonowned licensed brands such as the Calvin Klein white label — could command a higher price.

Kellwood has spent the last year making small acquisitions in higher margin markets, and these purchases have turned the tables to make the group a target for acquisition itself, according to Brad Stephens, an analyst for Morgan Keegan & Co. Inc. Last year, Kellwood stocked up on small contemporary lines, buying Vince in September and Hollywould in December. Last June, it bought activewear company Royal Robbins Inc. for about $40 million, and children’s line Hanna Andersson Corp. for about $175 million. But, while these are brands with growth potential, they don’t have much in common with each other and the integration could be tough, Stephens added.

“Sun Capital wants to have a stake in how Hanna Andersson and Vince are run,” Stephens said. “I’m not saying Vince is the next Juicy Couture or Hanna Andersson is the next Gymboree, but they see an inefficient structure with some good brands that have been acquired in the last year, and an opportunity to grow them.”

Stephens said there are two questions for a potential buyer to consider in evaluating Kellwood. “Do you think that these brands are at a floor or close to a floor in the women’s area? And are you comfortable as an investor running your manufacturing in Asia and making it run more efficiently?” he asked.

“The attraction to the portfolio is that you think it’s been run inefficiently, and you can improve it. If you can fix either one or both of those two, then this is a fantastic opportunity for Sun Capital,” Stephens continued. “But I’m not convinced we are at a floor with their core brands, and I don’t know what has happened in their facilities to make them that unprofitable. Are their problems purely self-inflicted?”

After factoring out the heavy restructuring costs the company has undertaken in the last few years, analysts equate Sun Capital’s bid to the going industry rate, based on Kellwood’s earnings.

For fiscal year 2006, earnings swung into the black to $31.4 million, or $1.21 a diluted share, from a loss of $38.4 million, or $1.42, in 2005. That was a dramatic drop, due largely to restructuring costs, from earnings of $70.1 million, or $2.50 a diluted share, in 2004, and $71.1 million, or $2.62, in 2003.

For the last two years, sales have been around $1.96 billion, down from $2.56 billion in 2004 and $2.35 billion in 2003.

After posting a $66.3 million second-quarter loss from continuing operations earlier this month, the vendor reorganized its executive suite and streamlined the women’s sportswear business by dividing it into Lifestyle Alliance for moderate brands, including Sag Harbor, Koret and Briggs New York; Designer Alliance for most of Kellwood’s better-and-above price point brands, including Calvin Klein women’s better sportswear, ck Calvin Klein women’s bridge sportswear, O Oscar, David Meister and Hollywould, and Modern Alliance for junior and contemporary lines, including XOXO, My Michelle and Vince.

UBS analyst Jeffrey B. Edelman puts the offer price at 6.5 times earnings before interest, taxes, depreciation and amortization for 2007 projections and 5.3 times 2008 forecasts, which “assumes a small reduction in clearance markdowns and cost benefits from restructuring,” according to the report.

According to Edelman, Li & Fung’s recent purchase of Claiborne’s moderate brands approximated 25 percent of sales, while this offer approximates 32 percent of sales, “raising the question of whether a higher bid would be forthcoming.”

“Kellwood has not had brand strength within its moderate sector to command a higher margin, a business that still appears to be losing market share,” Edelman said. “Its efforts to shift the mix toward potentially more profitable ‘better’ brands is the real key to a margin rebound. That, in our view, will determine the success of this deal going through, and whether a higher bidder will emerge.”

Randall J. Scherago, a principal at San Francisco-based Broadpoint Capital Inc., said in a note, “The offer price equates to a P/E multiple of 14x our FY08 EPS estimate, which is a similar valuation to apparel industry peers which trade at an average of 13.4x FY08 consensus EPS estimates.”

Scherago thinks Sun Capital is a good strategic match for Kellwood and doubts other companies will be interested in bidding more for the vendor.

“Sun Capital didn’t throw a crazy bid out there — they put it in the ballpark of what Kellwood’s peers, who are growing the top line faster than Kellwood, have been selling for,” Scherago said. “Whether the board accepts the bid will be a function of whether it wants continued scrutiny from Wall Street, which has shown no patience for them, knowing that it will take maybe three years to turn the company around.”

When Jones Apparel Group, another Kellwood competitor, first put up its For Sale sign in March 2006, observers said Jones was looking for at least $40 a share, when the company’s shares were around $35 each. By August, when the sale process fell apart after Bain Capital, the only remaining company in the bidding, was eyeing an offer of $28 a share, Jones’ board was said to be still looking for an offer around $36 a share.

Kellwood declined comment Wednesday beyond a briefly worded release that said: “The company’s board of directors will carefully evaluate the Sun Capital proposal, and other alternatives available to the company, taking into account the potential benefits that may be realized through the company’s previously announced long-term strategic plan.”

Executives at Sun Capital could not be reached for comment. According to the company Web site, Sun Capital is a private investment firm focused on “leveraged buyouts, equity, debt and other investments in market-leading companies that can benefit from its in-house operating professionals and experience.”

Sun Capital has invested in more than 160 companies worldwide since the firm began operations in 1995.

The firm has $10 billion of equity capital under management, and can invest more than $2 billion of capital in any one transaction. The firm is unique in that it often bridges the entire purchase price at closing, raising permanent debt financing afterward. Because it can close deals without external financing, transactions often close quickly, within a month, versus the usual three month-to-six month waiting period. Target companies typically have up to $5 billion or more in revenues, with most having sales between $50 million and $500 million.

In a WWD interview last year, Gary Talarico, managing director at Sun Capital, observed, “We are investing typically in underperforming companies or distressed firms….We are concerned with the causes of the underperformance of the retailer in question and whether they can be turned around to perform more in line with their peer group.”

While Sun Capital is probably more known for investments outside of apparel — Boston Market Corp., Chrysler Holdings and Friendly Ice Cream Corp., all last month — it is certainly not a stranger to the retail and apparel sector. Among its holdings are Mervyns (September 2004); French and U.K. branded jeans company Lee Cooper (May 2005); Shopko and Pamida (both in December 2005); cosmetics firm Stila (April 2006); GMAC Financial Services, which has a substantial lending portfolio base in retail and apparel (November), and The Limited Stores (August).

As for the nonbinding bid for Kellwood, Emanuel Weintraub of Emanuel Weintraub Associates observed: “This is only the beginning of a superconsolidation in the industry. Sun Capital has the money and the vision. If you have the vision and the funding capability, you do the deal.”

In unrelated news, Kellwood said Wendy Chivian, senior vice president and general manager of Badgley Mischka sportswear, has been named president of Kellwood’s Calvin Klein women’s sportswear, which includes its licenses for Calvin Klein women’s better sportswear and ck Calvin Klein women’s bridge sportswear businesses. Chivian succeeds Stephen L. Ruzow, who steps down Friday and whose departure was announced after Kellwood’s recent restructuring. Based in New York, Chivian reports to James S. Weinberg, group president of Kellwood’s Designer Alliance.

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