Tommy Hilfiger's New Look: A Buyout?

According to a report in the New York Post, Tommy Hilfiger is in exclusive talks to sell out to Phillips-Van Heusen (PVH), and the price tag could be as high as $4 billion. Keep in mind that the fashion label went private in 2005 for $1.6 billion. So, Hilfiger's private equity investor, Apax Partners, stands to make a tidy profit.

And even if a buyout deal does not materialize, Hilfiger is likely to wind up going public again. Either way, Apax will make a bundle.

Hilfiger's Business

Tommy Hilfiger quit school and started working in the fashion retail business at age 18. His first business went bust but he didn't give up. In the mid 1980s, he founded Tommy Hilfiger Corporation, which became a hot growth story. In 1992, the company went public and by 2005, revenues hit $1.8 billion.

By this time though, the apparel market was getting tough as the department store channel continued to consolidate. Tommy Hilfiger's shares were trading at 5.2 times EBITDA, which lagged comparable ratios of 7 to 11 times EBITDA. Operating margins were relatively weak, at 11%, and there were no clear growth drivers. There was also softness in the wholesale business.

But Apax saw this as a great opportunity to buy an iconic brand at a discount. In fact, the firm not only provided financial discipline but also put together a smart growth strategy, such as expanding into Europe. It also helped that there was no longer a need to post quarterly earnings for investors. The focus was on long-term performance.

The Deal

One of the largest apparel companies in the world, Phillips-Van Heusen has a wide assortment of brands that include Calvin Klein, Van Heusen, IZOD, ARROW, Bass and Eagle. In fact, its portfolio is fairly diverse and crosses various price points, distribution channels and demographics.

Actually, a key part of the strategy has been acquisitions. For example, PVH purchased Calvin Klein, ARROW, Superba and Mulberry. And yes, a deal for Hilfiger would fit in nicely. The company has a wide network of 950 retail stores across the globe. Moreover, Hilfiger's portfolio is diverse (there is even apparel for children). In fact, PVH and Hilfiger already have a licensing arrangement for shirts.

It also helps that PVH is showing traction. The company recently announced that it has raised its fourth-quarter outlook for the second time this year. The forecast is for adjusted profits of 59 cents per share, up from the 52 cents to 54 cents projected in January. Revenues are expected to be $612 million, up from the prior forecast of $603 million to $608.

In other words, PVH is certainly in a strong position to pull off a deal for Tommy Hilfiger -- which should also be a key to help moving growth forward.