Investment Dealer’s Digest (IDD): Fashioning a Solid Transaction

Date: 28-Jan-2011

Phillips-Van Heusen's $3 billion-plus purchase brought Calvin Klein and Tommy Hilfiger under the same roof

By Danielle Fugazy

Buying Tommy Hilfiger from Apax Partners for $3.1 billion made Phillips-Van Heusen, or PVH, one of the world’s largest apparel companies.

Shares of PVH, owner of the Calvin Klein brand, have appreciated over 45 percent since the deal was announced in May, and analysts who track the company say it is in a solid position for growth.

Plenty of factors made the buyer and seller seem to fit hand in glove. PVH had good brand recognition in the United States, analysts say, while Tommy Hilfiger had international appeal, and the deal elevated PVH from a middle-of-the-pack apparel manufacturer to a more diversified one. But that does not mean the transaction was easy to complete.

While the deal was being negotiated, the credit markets were unsettled by European sovereign debt concerns. Also, there were lots of egos that needed to be appeased.

More importantly, PVH was about to swallow a company larger than itself.

The bankers stitching the transaction together — Peter J. Solomon Co. was advising PVH, while Credit Suisse was advising Tommy Hilfiger — had their work cut out for them.

“There were a lot of moving parts to the deal and the financing, which added significant complexity. The team at Peter Solomon did an outstanding job pulling this all together,” says David Landau, a partner with LNK Partners, a private equity firm that helped finance the deal.

“This was a large acquisition relative to the size of PVH, and they were able to orchestrate the acquisition, the debt financing, public equity and a private equity financing. It was an incredible accomplishment.”

PVH raised money by selling secured debt and equity, including $200 million of preferred stock placed with LNK Partners and MSD Capital, another private equity firm, $2.4 billion of senior secured debt and $600 million of senior unsecured notes. The apparel company also raised $380 million through the sale of common stock. It also assumed some liabilities.

“PVH had anticipated raising all the money publicly, but the markets were very choppy, and they decided to get private-equity money involved,” says a source familiar with the transaction. Getting the different personalities to mesh also made the deal challenging. Both companies had enormously successful chief executives, not to mention designers.

Robin Rankin, the managing director in charge of retail and consumer banking with Credit Suisse, has found that strong personalities, sometimes, can unravel a deal. “But I must say they all put their shareholders first to make the best deal. We also all got creative with the terms because the financial markets weren’t there.”

Ken Berliner, the president of Peter Solomon, agreed: “The chemistry turned out to be excellent. There was a constructive thought process when addressing the various issues and overcoming obstacles.”

In addition to worrying about competing management personalities, sources say the designers Tommy Hilfiger and Calvin Klein had to be considered in the dealmaking process.

“The designers want to be kept happy, and it was the banks’ job to make that happen,” says a source. “It’s like rock stars; you have to keep the talent happy as well, which can sometimes be hard. To get this deal done, there were an unusual number of parties to consult with and get on board, but they succeeded.”

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