Apax Banks 4.5x on Tommy Hilfiger, Invests in PVH Again

Contrary to conventional wisdom, brands really can travel uphill. Apax Partners’ successful ownership of apparel company Tommy Hilfiger is living proof.

When the buyout firm took Tommy Hilfiger private in 2006, Tommy-branded apparel was being sold by warehouse outlet stores at deep discounts. Apax saw value in its international operations, and plunked down $450 million in equity for a total deal value of $1.6 billion. The firm promoted Fred Gehring from head of Europe to CEO, and embarked on two years of intense turnaround execution.

Apax and Tommy’s management sold its distribution business, acquired of licensees and aggressively expanded stores. Furthermore, Apax helped return Tommy Hilfiger to its status as a higher-end apparel brand by cutting back lower-end distribution and improving product quality. Ebitda increased by 42 percent under Apax’s ownership, and debt fell from 4.3x Ebitda to 1.5x. That all happened in a matter of two years.

Back in early 2008, Apax stated intentions to take Tommy company public, but pulled back after the economic collapse. With the IPO market sneaking back into vogue, speculation rekindled in 2009. But Stahl said a public market exit wouldn’t have been feasible until late 2010. When talks between PVH and Apax got serious, IPO plans were placed on the back burner. Apax was so confident in a PVH deal going through that it didn’t even approach other potential buyers.

Today Apax achieved a brand-name exit, selling the company to acquisitive apparel giant Phillips Van Heusen for $3 billion. Apax earned between 4.5x and 5x its money on the deal, according to Partner Christian Stahl.

The $3 billion includes $380 million in PVH stock, which makes Apax the largest shareholder in PVH. It’s not a new position for the firm. Apax acquired stock in PVH when it backed the company’s acquisitions of Calvin Klein earlier this decade. The firm sold its final shares in the company in 2006, just before the take-private of Tommy Hilfiger.

Look below for my full interview with Stahl, which includes details of the firm’s brand revival and turnaround strategy, as well as background on the exit:

This deal seems similar to your deal for Calvin Klein.
In some ways, yes. We invested in PVH and helped them acquire Calvin Klein and we sold out of our shares in that in early 2006. That’s also around the same time when we acquired Tommy. We sold out of PVH but maintained a strong relationship with the CEO for years. We’ve been having dialogue throughout the years and stayed in close contact.

Was it always in the back of your mind to sell Tommy to PVH?
The basic expectation was that we’d exit through an IPO. But we always keep all options open. We’re pleased it worked out the way it did because we had been having this dialogue and the timing was right.

Why did you cancel plans to take the company public?
We pulled IPO plans because of market conditions. The business was performing extremely strongly after we acquired it, and we were ready to get out in early 2008. But then the world stopped. Christmas trading was a disaster and uncertainty was great and we decided not to pull it even though the company  performed strong while the rest of the world didn’t.

Let’s back up a bit. What was Apax’s initial these for the investment in Tommy Hilfiger?
It was an unloved stock when we did the take-private. The focus was on the US business, which was not performing. There was a significant decline, year after year. The reaction of the previous management team was to take the brand further down-market, with discounting and cutting back on marketing and product quality. They were going further down the death spiral. We had a deep understanding of the international business which I don’t think the public markets understood. With a new mgmt team we turned it around by restructuring the US business and focusing on the international business.

What are some of the initiatives you employed?
We entered into an exclusive distribution with Macy’s and invested heavily in marketing and product quality to elevate the brand again. We stopped discounting and selling in the warehouse clubs. The brand perception in the consumer’s mind hadn’t been broken, but it was department store buyers that had lost confidence that product would sell at full price. They would receive the product and immediately discount it, and reaction of the company was to cut back in quality. We reserved that. We cut back our distribution to lower-end department stores and turned around the brand in the US. It’s now showing good growth despite the difficult economic environment. It may even be the strongest-performing brand at Macy’s. The international business was not understood by the market, but we understood it because we have a network of retail experts who were able to do the diligence and get comfortable with sustained high growth there.

We also divested the sourcing operations to Li and Fung, who have been a fantastic partner. We acquired a whole number of licensees to get better control of the brand. We bought out the shoe and handbag licensees, as well as the Japanese, Portuguese, Belgian, Turkish and Italian licensees. We invested heavily into retail store growth where we almost doubled the stores. We controlled how the brand was positioned there and that reinforced the global brand.

We also did a global marketing campaign. There was a bifurcation in positioning between the continental Europe and the US, and bringing back in line has been fantastic. Apax has been very involved on the M&A side, but it was the vision of Fred Gehring and his team put together a plan and executed against it very well. They were running the European business before we acquired the company.

What was Apax’s original equity investment?
It was $450 million.

So that makes your return…
Between 4.5x and 5x our money.

It looks like an Ebitda multiple of around 8.6x for the deal. Is this a full evaluation?
It’s a fair valuation. You can see the stock price reaction of PVH. It’s clear that this is going to be a fantastic deal for PVH and also a great deal for us. We’re looking forward to being their partner, and we’ll be the largest shareholder in PVH. We have had a fantastic past with them and are really excited about doing this again with them.

It’s your second time holding PVH stock.
And I hope not the last time!

So was this a dual track process?
The IPO opportunity would have been in the second half of the year for Tommy, so no.

Did PVH approach you?
The deal resulted out of our ongoing dialogue. It’s not clear who called whom first.

So there was no formal auction process.
Yes, it was a proprietary deal for them.

Since it was well-known in the market that Apax was ready for an exit, I would guess you got other offers at some point.
You always get some inbound calls. But there was nothing else that was reliable or exciting to us.