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Another Deal Cooking: VF Corp. Said in Talks For Nautica Acquisition

VF Corp. could be the next company to land a big designer name, as sources say it is involved in intense negotiations to acquire Nautica Enterprises.

NEW YORK — Could VF Corp. be the next company to land a big designer catch?

According to sources, VF is involved in intense negotiations to acquire Nautica Enterprises, the $694 million diversified apparel company that’s had its ups and downs the past few years.

As reported, Nautica announced Friday it was talking to potential acquirers to enhance shareholder value. A spokesman for Nautica reiterated, “The company is not going to comment on speculation regarding the sale process.” He also noted that Harvey Sanders, chairman and chief executive officer of Nautica, was traveling this week and unavailable for comment.

A spokeswoman for VF told WWD, “We have a company policy where we don’t comment on market rumors or specific acquisition targets.”

One financial source estimated that a buyer would have to pay about $15 a share, or a total of about $500 million, for Nautica, about a 15 percent premium to the stock’s closing price on Monday. Nautica shares closed at $13, down 36 cents, or 2.7 percent, in Nasdaq trading as all major indices moved sharply lower.

VF has been eager to buy a major designer name for a while. The group, whose revenues in its last fiscal year were $5.7 billion, came close to buying Calvin Klein Inc. in December, but was outbid at the last minute by Phillips-Van Heusen. A Nautica deal would give VF a strong foothold in the men’s collections area of department stores with its men’s sportswear line and would give VF two well-recognized jeanswear brands for department store distribution — Nautica and Earl Jeans. Nautica also manufactures and markets the highly respected John Varvatos men’s wear collection, which will be shown in Milan Wednesday.

But Nautica has had particular difficulties in its core men’s sportswear division in the last few years, while its women’s jeanswear and Earl Jeans operations also were challenged in fiscal year 2003. Nautica’s men’s jeans, sleepwear and children’s wear performed well last year, however. Nautica had income of $20.7 million on sales of $693.7 million in fiscal 2003.

VF’s denim lineup includes Wrangler, Chic, Brittania and Gitano in the mass market and the Lee and Riders labels at national chains and department stores. VF’s other, nondenim brands include Vassarette, Jansport, The North Face and HealthTex.
VF is known for its solid execution and sound management, but the company hasn’t had an ideal track record with designer names. Through the Nineties, it licensed the Marithé and François Girbaud jeans line in the U.S. While the collection grew quickly to a peak of $250 million in 1992, it soon petered out.

As reported, Nautica’s decision to entertain suitors came in response to a filing last week by Barington Cos. that it was dropping former Macy’s West chief Michael Steinberg from the list of directors it was proposing for election to Nautica’s board via proxy, leaving William Fox and James Mitarontonda as its nominees. Barington continues to seek the unseating of two directors, John Varvatos and Charles Scherer, at Nautica’s annual meeting July 8, but with Steinberg’s removal, it no longer opposes the reelection of Steven Tishman to the board.

Barington, which owns 3.1 percent of Nautica, issued a press release Monday saying it continued to seek representation on Nautica’s board of directors, noting, “The Barington Cos. group believes that Nautica has shown poor operating performance, which has caused a material reduction in shareholder value. The Barington Cos. group believes this is attributable to the current board’s limited independence and disappointing oversight of operations. The Barington Cos. group believes that the current board of directors lacks representation from a sufficient number of independent and experienced directors who will advocate the interests of all stockholders.” The statement carried a quote from Mitarontonda, saying: “We are pleased that Nautica has announced it is in discussions about the possible sale of the company.”

Several market observers believe Nautica would make a great acquisition for VF Corp.

Paul Altman, vice president of The Sage Group, a Los Angeles-based investment banking firm that advised Earl Jean on its sale to Nautica in 2001, said he hadn’t heard about any VF-Nautica talks. However, he noted, “Nautica is broadly diversified in terms of product, and to a lesser extent, category. Nautica has a solid denim business, but it is not the heart of the enterprise. For VF, jeans are its core business at 55 percent, and it is under threat from Levi’s (because of its Signature line for Wal-Mart), as well as suffering from the general retail slowdown. If VF were to buy Nautica, it would be able to diversify its denim business, bringing it up-market through Nautica Jeans and Earl Jean, while simultaneously diversifying its entire product line away from VF’s heavy reliance on denim.”
In addition, he said that from a financial point of view, “Nautica’s revenues would move the needle between 10 and 15 percent, but it would not contribute profit to the same degree, as it’s less profitable than VF, in both dollar and percentage terms.”

Altman added that VF would benefit through distribution since there is no significant channel overlap between companies, with VF selling 30 percent of its merchandise through the mass channel and 35 percent through moderate department stores, and Nautica selling most of its products through better department stores and, to a lesser extent, boutiques. “This type of acquisition would give VF a stronger presence with the Federateds of the world,” said Altman.

“That makes an enormous amount of sense,” said Allan Ellinger, managing director of Marketing Management Group, a management consulting firm here. “I think Nautica offers VF some very compelling brands, better distribution and product categories that dock into VF’s core competencies. This would be a situation where one plus one would definitely equal more than two.”

R. Fulton McDonald, president of International Business Development Corp., a management consulting firm here, said he thought a VF-Nautica merger would be a good move. “VF is disciplined, it’s careful and has a lot of feel for the women’s market on a lot of levels. Assuming they integrate those skill sensibilities, they [VF] will be much more successful [in the women’s area] than Nautica by itself,” said McDonald.

On the other hand, Virginia Genereux, a research analyst at Merrill Lynch, wrote in a note Monday that after reviewing Nautica’s public filings, “Nautica is unlikely to be sold.”

“First, Nautica’s disclosure that it is in preliminary merger discussions comes in response to a proxy fight led by the Barington Group, a private investment group seeking two seats on Nautica’s eight-person board of directors, whose agenda may include a sale of the company,” she wrote. She said Barington owns 3.1 percent of Nautica, with an average basis of about $10.60.

She noted that in November 2001, Nautica adopted a shareholders’ rights plan, which would become exercisable only if a person or group other than Sanders buys 15 percent or more of the company’s stock. “Such rights cause substantial dilution to any party trying to acquire the company,” wrote Genereux.
“Any sale of the company has hidden costs. The employment agreements of chairman and ceo Harvey Sanders, vice chairman David Chu and John Varvatos ceo John Varvatos call for change-of-control payments totaling $9.3 million. In the event of a change of control and if Harvey Sanders is no longer employed by the company, the John Varvatos brand must be spun off or sold; or John Varvatos may elect to either be paid 10 percent of the brand’s net income as long as he is ceo, or to receive a lump sum payment of two times the brand’s net income for three years (not to exceed $50 million.) Any acquirer then likely surrenders a substantial portion of the economic value of the John Varvatos brand,” Genereux wrote.

In a Prudential Financial report by Lizabeth Dunn issued Monday, the investment firm downgraded Nautica to “sell” from “hold,” maintaining its $11 price target because of its belief that Nautica’s share valuation is extended.

“We think a sale is unlikely and believe Nautica shares are now fully reflecting an acquisition. Also, while management has strategies to turn the business around, we think progress will take time and without an acquisition, the shares are reflecting most of the upside for strategic initiatives. While we do believe management is doing its job and things should get better over time, the strategies for fixing the business are far from in the bag and we are hesitant to include much upside in our estimates,” she wrote.

As for VF’s financial health, this spring the corporation said it was affected by a tough retailing environment exacerbated by the Iraqi war, unseasonably cool weather and inventory reductions taken by VF’s retail customers. Discussing the downward revision in its second-quarter earnings expectations last week, Robert Shearer, VF’s chief financial officer, told analysts, “Our brand sell-throughs at retail are as strong as, if not stronger than, our competitors. Generally, we believe that we’re holding or gaining share in our key categories, jeanswear and intimates, as well as other areas of our business such as outdoors. So while in some cases our shipments to retailers are down, our sell-throughs at retail are positive. Again, this is the result of the aggressive inventory reduction actions taking place at retail.”
“Any sale of the company has hidden costs. The employment agreements of chairman and ceo Harvey Sanders, vice chairman David Chu and John Varvatos ceo John Varvatos call for change-of-control payments totaling $9.3 million. In the event of a change of control and if Harvey Sanders is no longer employed by the company, the John Varvatos brand must be spun off or sold; or John Varvatos may elect to either be paid 10 percent of the brand’s net income as long as he is ceo, or to receive a lump sum payment of two times the brand’s net income for three years (not to exceed $50 million.) Any acquirer then likely surrenders a substantial portion of the economic value of the John Varvatos brand,” Genereux wrote.

In a Prudential Financial report by Lizabeth Dunn issued Monday, the investment firm downgraded Nautica to “sell” from “hold,” maintaining its $11 price target because of its belief that Nautica’s share valuation is extended.

“We think a sale is unlikely and believe Nautica shares are now fully reflecting an acquisition. Also, while management has strategies to turn the business around, we think progress will take time and without an acquisition, the shares are reflecting most of the upside for strategic initiatives. While we do believe management is doing its job and things should get better over time, the strategies for fixing the business are far from in the bag and we are hesitant to include much upside in our estimates,” she wrote.

As for VF’s financial health, this spring the corporation said it was affected by a tough retailing environment exacerbated by the Iraqi war, unseasonably cool weather and inventory reductions taken by VF’s retail customers. Discussing the downward revision in its second-quarter earnings expectations last week, Robert Shearer, VF’s chief financial officer, told analysts, “Our brand sell-throughs at retail are as strong as, if not stronger than, our competitors. Generally, we believe that we’re holding or gaining share in our key categories, jeanswear and intimates, as well as other areas of our business such as outdoors. So while in some cases our shipments to retailers are down, our sell-throughs at retail are positive. Again, this is the result of the aggressive inventory reduction actions taking place at retail.”

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