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Not Quite a Fever, But Industry's LBO Tempo Could Pick Up

Fashion stocks could be back in fashion, as several private equity investment firms specializing in LBOs are taking a closer look at this sector.

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While consumers loved the St. John label that was the core of the firm’s business, they weren’t so hot about its extension brand, SJK. Faced with difficulty in meeting Wall Street’s growth expectations, the company began looking at other options for growth beyond its core knit line.

The company in 1998 found a partner in Vestar Capital Partner, which took it private in a stock buyout that gave 77 percent ownership to Vestar, and 16 percent to the Gray family. The remaining 7 percent is publicly traded over the counter.

LBOs are not without their risks. There have been several firms that have followed the LBO route since its heyday in the Eighties, and at least three — all done in 1986 — have left their investors awash in red ink.

Edward Finkelstein, chairman of R.H. Macy & Co., the fifth-largest department store chain at the time, took the company private through an LBO valued at $3.6 billion. Ronald Perelman completed a $1.8 billion acquisition of Revlon via an LBO. Linda Wachner, former chairman of Warnaco Group, completed her hostile LBO of that firm.

Since then, those firms have had their share of troubles. R.H. Macy eventually filed for bankruptcy, and was subsequently acquired by Federated Department Stores, itself a victim of a bungled LBO by Canadian real estate mogul Robert Campeau.

Revlon went public in March 1996, after one failed attempt in 1992. Since the LBO, the company has been plagued by losses even back in 1992. Proceeds from the 1996 IPO — $180 million was raised through the sale of 7.5 million shares at $24 a share — were used to pay down debt. Revlon was saddled at the time by about $1.5 billion in debt from the LBO. Earlier this month, the company reported its 17th straight quarterly loss.

In the case of Warnaco, the company went public in 1991, but then, after a series of acquisitions, ran into cash-flow problems that eventually led it to file for bankruptcy. It exited bankruptcy proceedings in January, and is now known as Warnaco Inc.
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