Clothing maker PVH Corp (PVH.N) will unite Calvin Klein underwear, jeans and sportswear lines under one roof in a $2.8 billion deal to buy rival Warnaco Group Inc WRC.N, the latest move in the consolidation of the apparel manufacturing industry.
The cash and stock deal also nets PVH brands like Speedo and Chaps to go along with its Tommy Hilfiger, IZOD and Van Heusen brands.
PVH shares rose 20 percent on the deal, which is expected to add to earnings as soon as it closes. Warnaco rose almost 39 percent.
"The deal is fairly priced and the combination makes a lot of sense strategically," said Lauren Taylor Wolfe, managing director of Blue Harbour Group, which owns more than 3 percent of Warnaco's shares. She said there are other revenue opportunities from the combination that have not been included in projections from PVH Chief Executive Emanuel Chirico and his team.
The clothing manufacturing industry is seeing active consolidation, as bigger vendors buy up smaller players and licensees to gain more control over their brands, find more flexibility in operations and save money. VF Corp (VFC.N), another major player in the space, is known for constantly looking at bolt-on deals to add to its portfolio.
PVH bought Calvin Klein in 2003 and makes formal and sportswear under that brand. Warnaco has held the licensing agreements for Calvin Klein jeans and underwear since 1997 and operates around 1,760 Calvin Klein retail stores worldwide.
"I believe Manny will go forward and shareholders will get the benefit of the top line as they make use of Warnaco's presence in India and LatAm and also as he controls more of the CK brand. As he controls the brand, he also has an opportunity to think about retail expansion," Wolfe said.
The parties expect the deal to close in early 2013.
HERITAGE BRANDS AND INTERNATIONAL GROWTH
Morningstar analyst Peter Wahlstrom noted PVH would have access to Warnaco "heritage" brands like Speedo, Chaps, Warner's and Olga, which are complementary to PVH's current portfolio.
"The heritage segment ... will be slow growing, but solid cash flow generators for PVH," he said.
Analysts at Piper Jaffray said the strong distribution platform that Tommy Hilfiger has in Europe will be a positive for CK jeans.
The combined business will have $8 billion in annual revenue. PVH expected the acquisition to add 35 cents a share to earnings, excluding special items, in the first year and $1 in the third year, when it forecasts annual savings of about $100 million.
PVH said it now expected full-year earnings per share to come in at the high end of its October 2 outlook of $6.32 to $6.37 per share excluding special items.
Based on PVH's closing price of $91.50 on Friday, the deal values Warnaco at $68.43 a share for a premium of 34 percent.
PVH shares jumped 20.2 percent to close at $109.99 on Wednesday, and shares of New York-based Warnaco surged 38.7 percent to end at $70.58, both on the NYSE.
On a call with analysts, Chirico said the company would use the deal to directly develop its Tommy Hilfiger brand in established Warnaco markets.
Companies often have to depend on third-party manufacturers, marketers and licensing agents to sell their brands in international markets, making it a costly and time taking process. Direct control allows them more flexibility and saves them money.
PVH is paying $51.75 in cash and 0.1822 of a share of common stock for each Warnaco share.
The deal value is based on Warnaco's 40.87 million shares outstanding as of August 1.
Warnaco's Calvin Klein businesses will be run by Tom Murry, chief executive officer of Calvin Klein.
PVH, which competes with Ralph Lauren Corp (RL.N), Perry Ellis International Inc (PERY.O) and Michael Kors Holdings Ltd (KORS.N), said it had commitments for $4.33 billion in financing from Barclays (BARC.L), BofA Merrill Lynch (BAC.N) and Citigroup Global Markets Inc (C.N).
(Additional reporting by Olivia Oran in New York, Siddharth Cavale and Sakthi Prasad in Bangalore; Editing by Erica Billingham, Sriraj Kalluvila, Lisa Von Ahn, Leslie Gevirtz, Andrew Hay and Phil Berlowitz)