Women’s Wear Daily
04.23.2014
fashion-features
fashion-features

Bidding for Kellwood: Offer by Sun Capital Sends Shares Soaring

At first blush, Sun Capital Securities Group LLC's unsolicited $543 million bid for Kellwood Co. may seem low.

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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.

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