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With Barneys in Hand, Boneparth Seeks to Double Its Size

Peter Boneparth doesn’t shop at Barneys, but the Jones Apparel Group ceo will be spending more time there, trying to turn it into a billion-dollar baby.

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NEW YORK — Peter Boneparth has a new trophy — Barneys New York — and he believes it can be a billion-dollar baby.

Jones Apparel Group confirmed on Thursday that it will purchase Barneys for $400 million, a deal Boneparth, Jones’ chief executive officer, expects to close by the end of the year.

The luxury retailer will remain under the leadership of its ceo, Howard Socol. With the help of Jones’ deep pockets, Socol plans to expand the specialty chain’s fleet of flagships and, next spring, add three Co-op concepts in Costa Mesa, Calif., Chicago and Atlanta.

Barneys may also see more stores overseas. “As Asia gets more and more affluent, there will be more opportunity,” Boneparth said during an conference call with Wall Street analysts. He said that while other parts of retail are fairly mature, Barneys is the exact opposite, “an immature opportunity in the U.S.”

The marriage is a step outside the norm for Jones, known primarily as one of the industry’s leading moderate and better apparel manufacturers, even though it operates roughly 900 stores, many of them specializing in footwear, as a result of its purchase of Nine West in 1999.

Boneparth told analysts that the Barneys high-end business melds wells with the distribution channel for Jones’ existing operations.

“Whether you like it or not, America is getting both poorer and richer at the same time, which is an unfortunate social commentary, but a real fact of life,” he said. “So catering to that growing number of wealth, truly wealthy people, we perceive as a real opportunity for this company.”

In a joint interview with Socol at Barneys’ flagship store on Madison Avenue, Boneparth said, “It’s an aspirational thing to be able to shop at Barneys and that’s not limited to the borders of the United States.”

It is also an avenue of growth that does not challenge any of Jones’ existing businesses. Barneys, with annual sales of $444.2 million, can be built into a $1 billion business, Boneparth said, though he declined to be pinned down to a timeline. Last year, Jones posted revenues of $4.38 billion.
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Socol noted that other members of the senior management team also will be staying on at Barneys.

“The senior-level management group, excluding me, has an average of 13 years at the company, or a total of over 100 years experience living and breathing Barneys,” he said. “We are all looking forward to making Barneys the best it can possibly be and are incredibly motivated by this.”

Socol declined to divulge the terms of his new employment pact, but said that he has a “long-term” agreement to stay at the helm of Barneys. One immediate change for him is that he has already tendered his resignation of his board seat at Liz Claiborne Inc., a Jones competitor.

The Jones-Barneys deal includes cash consideration of $19 per share to Barneys’ stockholders totaling $294.3 million. Jones also will fund the repurchase of Barneys’ outstanding senior secured notes due 2008, with a face value of $106 million, through a tender offer that will be executed by Barneys.

While some analysts voiced skepticism about the deal, investors shrugged at the news, sending shares of Jones down $1.06, or 2.9 percent, to close at $34.92.

“The risk-reward on this was very, very attractive,” Boneparth said. “This is not a bet-the-company event.”

Still, Barneys was not a bet the apparel giant had initially planned.

“We weren’t frankly looking for Barneys until Barneys came along and then it started to really gel in our minds,” Boneparth said.

“They saw a very pretty girl and they wanted to date us,” Socol added.

Boneparth, trying to assuage fears that Jones was getting into the unfamiliar territory of luxury accessories and designer apparel, said Barneys would be allowed to continue its course with the benefits of Jones’ financial muscle and logistical expertise.

“We simply won’t Jones-ize Barneys,” he said. “When everybody takes a deep breath, they’ll realize that if we were to do that we shouldn’t have bought Barneys. It is very safe to say that anything we sell today will not be in Barneys in the future.”
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Boneparth said the Jones senior executives “intuitively” understand the luxury business and are, in many cases, Barneys customers.

“What this business is about is diversification, by brand, by channel, by demographic,” Boneparth said. “When you first put your toe in that demographic, whether it be moderate or luxury, it looks like somehow you’re going far afield.”

Boneparth pointed to the acquisition of Nine West, which gave Jones entry into retail and was similarly questioned by analysts. He said that move has paid dividends and is a strategy the company added to with the purchase of Maxwell Shoe Co. for $346 million in July.

Jones expects to gain more than girth from Barneys.

“We will learn about fashion,” Boneparth said. “We will learn much more about design. We’ll understand their vendor base much better and you never know where that will lead. Jones is going to evolve in line with where the customer’s evolving. We need to go where they’re going.”

The move into luxury is also a chance for Jones to help support a core business that isn’t growing as quickly. Sales of better-priced apparel, led by its Jones New York brands, are slated to grow by low-single digits, while moderate, with labels such as Bandolino and Gloria Vanderbilt, is slated to grow somewhat faster.

The retailer requires little in the way of integration for Jones, said Boneparth, who nonetheless said no more deals were on the immediate horizon.

“We’re very cognizant of absorption, meaning we’re not going to stretch ourselves too thin,” he said.

For Socol, who has been conducting “presentation after presentation after presentation” to potential buyers, the deal with Jones means he can get back to spending more time on the business of retailing.

“This enables us to take a longer-term view and have a little bit more money in our pockets,” he said.

Socol seemed at “home” with his new parent, noting how Jones is a good fit for Barneys and how having a permanent “home” with a strategic buyer allows it to plan for the future as opposed to facing another change a few years down the road had a financial buyer bought the firm.
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“I feel that Jones, after we went through a lot of presentations, understood what I and management wanted for this company,” Socol said. “Jones saw Barneys for what it could be, and will help us prosper and get even better.”

He added that 84 companies received copies of the prospectus, including Jones.

“Peter asked for a book and started, on a continuous basis, the best due diligence of all the prospective bidders,” Socol said. “The company did its homework better than anyone and in the end understood us the best. We wanted a buyer who had deep pockets so we can grow and who had an understanding of the Barneys brand. We found that in Jones.”

While financial firms are sometimes criticized for focusing solely on getting the best return on their investment, Socol was quick to note that David Strumwasser of Whippoorwill Associates and Douglas Teitelbaum of Bay Harbour Management, the firms that are Barneys’ co-owners, felt strongly about finding a buyer that would allow Barneys to grow, instead of one that might change it into a different format.

The boards of both companies have approved the transaction and certain stockholders owning 75 percent of its common stock have agreed to execute a written consent approving the transaction. No further stockholder action will be required.

Barneys was acquired by Whippoorwill and Bay Harbour in 1999 when they bailed out the upscale retailer from bankruptcy proceedings.

“It just sounds like we’ll make a really good partnership. Both companies are different enough that we can learn from each other, and that’s the best kind of partnership,” said Julie Gilhart, fashion director of women’s at Barneys.

The reaction from the industry and Wall Street was a mix of surprise and skepticism.

“From a strategic perspective, one would have to question how anxious some of the world’s better designers would be in showing Barneys’ buyers, now of Jones Apparel Group, their next season’s collection, as well as their possible concern about the designs being copied before its gets to retail,” said Allan Ellinger, a partner at consultancy MMG.

“I’m probably the only person who thinks it’s not that crazy,” said Tradition Asiel Securities analyst David Griffith. “It’s an interesting risk and I don’t think the risk is all that big for Jones. It is a way for them to diversify. It’s a way for them to get access to an attractive market and it gives them access to a growth vehicle, which, let’s face it, there aren’t that many things in the supply chain that you can point to as having really positive growth.”
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The analyst said that, with the Nine West deal, “I kind of crinkled my nose a little bit at the time.”

“They made believers of a lot of people that they can integrate a specialty retailer,” he said.

Robert Drbul, analyst at Lehman Brothers, wrote in a research note that Barneys meets the criteria for Jones’ acquisition strategy, but cautioned that Jones’ near-term outlook remains challenging “given the difficult retail environment.”

Drbul noted that after the acquisition, retail would represent 24 percent of Jones’ sales in 2005 versus previous expectations of 17 percent, and the specialty retail channel will represent 28 percent of sales in 2005, compared with expectations of 21 percent prior to the acquisition announcement.

Dennis Rosenberg of Credit Suisse First Boston, in his note, wrote: “Jones’ poor acquisition record and mature brand portfolio have resulted [in] volatile earnings with no net growth since 2000. Over this span there have been periods when results were positive and the outlook appeared to be favorable, but, invariably, earnings disappointed.”

He pointed to Kasper’s fashion miss in the third quarter of fiscal year 2004, L.E.I.’s sales shortfall, also in the third quarter of fiscal 2004, and Nine West’s earnings disappointments in 2001, 2002 and 2004. Rosenberg also noted that while Gloria Vanderbilt was an acquisition that worked, McNaughton’s strategy to diversify was impacted by moderate apparel’s earnings decline in 2002 and 2003.

Investment bankers were more realistic about the pressures facing companies as they search out avenues for growth.

“The large companies like Liz Claiborne, Jones, VF Corp., Kellwood and Phillips-Van Heusen all need to grow,’’ said Marc S. Cooper, the banker at Peter J. Solomon who represented Barneys. “At some point, the $4 billion in sales can’t be accomplished organically and the firms have to look for growth vehicles that are also accretive. They are increasingly looking outside the box for other opportunities.”

Past examples include Jones’ purchase of Nine West Group and VF’s acquisition of Vans. Another example is Sears, Roebuck & Co. in its purchase of catalogue firm Lands’ End, a deal in which Cooper’s firm represented Sears.
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“Jones wasn’t on our list to call,’’ he said. “This is really about the vision of Peter and his team. In retrospect, we think it is a very smart vision. Peter is looking to build a portfolio that is diversified, an apparel business that is bullet proof and has consistent growth through good years and bad years. This is an interesting way to build in some of that diversification by gaining access to the luxury market with one of the premium brands in that market place.”

Cooper said that’s what many firms need to do to grow their business, but it’s all about what decisions they make to get there.

“As large firms have to grow, they’ll become more creative even if it entails doing things that one wouldn’t have thought was natural in the company’s business life,” said Gilbert Harrison, chairman of investment banking firm Financo Inc.

Harrison added that a “deal, however, has to make sense, and a company’s board and shareholders, as well as public investors, may question the logic behind any acquisition, especially if there’s no synergy or compatibility between the buyer and seller.”

Paul Altman, a banker at The Sage Group, said the purchase price of $400 million is “7.9 times earnings before interest, taxes, depreciation and amortization and 0.9 times revenue multiples.” Other better-to-premium retailers trade at slightly lower EBITDA multiples, with the average at seven times, and with similar revenue multiples. The purchase price for Barneys, he concluded, is in line with other public retailers.

As for what Barneys brings to the Jones umbrella, Altman said, “What Jones gets is a world-class retail brand and it is up to Jones to effectively leverage that brand equity. In terms of Jones’ wholesale business, given their acquisitive history, this purchase expands Jones’ universe of potential purchases down the road to include the type of luxury brands that Barneys sells.”

At A Glance: Jones Apparel Group

SPECIALTY RETAIL
BRAND
NUMBER OF STORES
FACTORY OUTLETS
Nine West
217
134
Easy Spirit
145
101
Enzo Angiolini
24
0
Bandolino
16
0
Jones New York
0
127
Kasper
0
70
Anne Klein
0
12

WHOLESALE APPAREL
BRAND GROUPS
RETAIL PRICES
Jones New York
$15-$458
Nine West
$19-$307
Anne Klein
$20-$1,895
McNaughton
$29-$80
Gloria Vanderbilt
$26-$72

SOURCE: JONES ANNUAL REPORT

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