Tommy on the Block: Book Out on Hilfiger, Bidders Are Circling

Tommy Hilfiger Corp. is on the auction block, and the asking price is big: The company could fetch as much as $1.82 billion.

Until last week, Hilfiger's subsidiary Tommy Hilfiger U.S.A. Inc. was being investigated by the U.S. Attorney's office for its commission policies. The company last Wednesday said it settled the U.S. tax probe for $18.1 million, and that the U.S. Attorney's office agreed not to prosecute Hilfiger or its subsidiary.

Although there are still some state tax issues pending, now that the criminal probe is resolved, the path seems clear for the company to be sold.

There were rumblings in May 2003 the company was in play. Sources said there were talks with potential buyers, such as Jones Apparel Group. Those talks supposedly cooled because Hilfiger was considered too expensive to be sold. Another hurdle was Tommy Hilfiger's contract, which entitles Hilfiger to receive 1.5 percent of U.S. revenues in excess of $48 million.

In June of 2003, Hilfiger hired J.P. Morgan Chase to assist it in "exploring acquisitions of additional brands." Hilfiger had been on the acquisition hunt for several years, having looked at Calvin Klein, Marc Ecko Enterprises and Rocawear.

In December 2004, Hilfiger acquired the Karl Lagerfeld trademarks for an undisclosed amount of cash. The deal allows Hilfiger to globally expand Lagerfeld Gallery, the women's luxury ready-to-wear collection that encompasses the Karl Lagerfeld trademark, and the Lagerfeld brand women's, men's and accessories lines, which are licensed. In addition, Hilfiger has the option of adding apparel and accessories categories, as well as open retail stores worldwide. The transaction also includes the two Lagerfeld Gallery stores in Paris and Monaco.

The company signed a five-year contract with Lagerfeld for design and creative direction for his brands.

Rumblings of a sale resurfaced in June when Merrill Lynch analyst Virginia Genereux issued a report titled "Tommy Hilfiger, Your Most Likely Takeout Candidate." In her report, she noted that while "financial buyers typically avoid mature branded apparel companies, [Hilfiger] has the critical [leveraged buyout] ingredients." She also noted that Hilfiger's troubled U.S. wholesale business is now only at 28 percent of sales, or less than $500 million. In contrast, "Europe remains robust and highly profitable, and will comprise about 35 percent of sales this year."

Last week, following a Hilfiger conference call Thursday on first-quarter earnings, Lizabeth Dunn of Prudential Equity Group issued a report in which she concluded, "After our conversation with the company, we do think an acquisition is more likely than we previously assumed."

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