“Nothing comes between me and my Calvins” was the memorable ad slogan cooked up by designer Calvin Klein and delivered saucily by Brooke Shields in 1981. Yet it is only now, 31 years later, that the tops and bottoms of Calvin Klein’s most important licences have again been unified with U.S.-based PVH’s $2.9-billion (U.S.) acquisition of rival clothing manufacturer Warnaco. Investors seem to be as titillated by the deal as consumers were by a 15-year-old Ms. Shields in tight-fitting denim.
In part that’s because putting these two companies together has long been a grand design in the garment trade, not least because one firm controlled the rights to Calvin’s formal and sportswear, the other to his infamous jeans and undergarments. Moreover, by combining, PVH-Warnaco expect to scissor some $100-million of annual cost savings over the next three years. After taxes, these could be worth as much as $700-million to shareholders today.
What’s surprising, though, is the added excitement the deal has created among both sets of investors. Warnaco’s owners are obviously happy to sell for a 34-per-cent premium to Friday’s close of trading before Hurricane Sandy shuttered markets. But PVH shares surged as much as 18 per cent on the deal, too.
Exactly why this should happen is hard to stitch together. After all, PVH is paying a $718-million premium for synergies worth less than that, once discounted to reflect the fact it will take three years to harvest them. And that’s without taking into account $175-million in one-time costs associated with the transaction. If anything, PVH shares should see a slight decrease in their value.
So what’s throwing PVH investors into a tizzy? The only reasonable explanation is that PVH has a proven track record as an acquisition machine. In addition to acquiring Calvin Klein in 2003, it bought Tommy Hilfiger two years ago and successfully integrated it into a portfolio that includes the Van Heusen, IZOD, ARROW and Bass brands. Investors, it seems, think PVH can squeeze more out of the deal than Brooke Shields was able to squeeze into her jeans.
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