Apax Scores Big On Two Retail Deals

A recent spate of exits from retailing companies may be a sign that buyout shops are seeing signs of revival on Main Street, even if retail sales are only barely reflecting the change.

Apax Partners announced two such moves this month. In addition to its $3 billion sale of portfolio company Tommy Hilfiger Group to Phillips-Van-Heusen Corp., announced March 15, Apax also said it had halved its holding in rue21 Inc., a discount retailer of teen apparel, which the London-based firm took public last November. The secondary public offering was announced by Apax on March 4.

Following Oak Hill Capital Partners‘s $1.1 billion exit from New York drugstore chain Duane Reade Holdings, these exits should bolster the confidence of buyout firms with retail holdings waiting in the wings for their own exit opportunities.

“Business is getting better. Business is better in the apparel industry, and it’s better in the retail industry,” said Kenneth T. Berliner, the president of Peter J. Solomon Co., a New York investment banking firm, which advised Phillips-Van-Heusen in the Hilfiger deal and Walgreen Co. in its deal to buy Duane Reade. “There are opportunities all across the consumer spectrum,” Berliner said, citing food and beverage, consumer products and household goods as categories where he is seeing buyer interest.

The sale of Tommy Hilfiger reunites Apax with PVH in a cash-and-stock deal. Apax had taken a 38 percent stake in the publicly-traded apparel firm in 2003 when it sold then portfolio company Calvin Klein Inc. to the New York company. Apax shed the PVH stake in 2006 because of the potential conflict of interest after it bought the rival Tommy Hilfiger. “It was great to bring all this together and become partners with PVH again,” said Christian Stahl, a partner at Apax and the deal leader for Tommy Hilfiger.

The sportswear brand fit especially well with PVH’s desire to expand outside the United States, because of Tommy Hilfiger’s brand recognition in global fashion markets, a strength Apax had recognized in deciding to buy the company in 2006, Stahl said. “Our thesis back then was based very much on our understanding of their standing in international markets, very healthy, growing, in a more prestigious position than it was in the United States.”

Although Tommy Hilfiger was an “iconic American brand,” its reputation had declined among a key constituency—buyers at high-end department stores—because of the company’s willingness to offer its products through discounters and mass merchants, Stahl said. “The buyers in the department stores had lost their faith in the ability of the brand to sell at full price.”

To shore up the Tommy Hilfiger label, Apax bought a series of licensees and distributors around the world as add-on acquisitions over the following four years, Stahl said. “That allowed us to control how the brand is positioned and presented.”

As the deal is structured, PVH would pay €1.924 billion ($2.592 billion) in cash and €276 million in PVH common stock to Apax and the other Tommy Hilfiger shareholders and would take on another €100 million in Tommy Hilfiger liabilities. That would give the selling shareholders 8.7 million shares, or about 13 percent of the PVH stock outstanding. The deal is expected to close in PVH’s fiscal second quarter, which ends in late July or early August. Apax stands to earn about 4x its capital investment from the sale.

In the case of rue21, Apax sold $6.1 million shares at $28.50 per share in a secondary offering that closed Feb. 25, realizing a 7.3x return on investment. Apax said would sell an additional 908,000 shares to satisfy an underwriters’s over-allotment option, in total generating $187 million. Apax said its funds would continue to hold 7.1 million shares of rue21, or 29 percent of its outstanding stock.

Rue21, of Warrendale, Pa., went public last November, with the company and minority shareholders selling 6.8 million shares at $19.00 each. Apax said its funds did not participate in the IPO.

Retail is one of five major focus areas for Apax, and the company listed a number of current and former portfolio companies in its rue21 announcement, including New Look, Tommy Bahama, Dollar Tree Stores and Children’s Place. Stahl would not discuss any plans Apax might have for other prominent holdings, but the improving economy is giving the firm encouragement to shop.

“We’re always thinking about whether there is an opportunity to exit,” Stahl said. “We’re always looking for ways to monetize our investments.” Berliner of Peter J. Solomon said that although Tommy Hilfiger, with its strong brand and international distribution, represented a unique opportunity, this is not just an isolated instance.

“There are strategic buyers that are willing to make moves,” Berliner said. “Financial buyers are taking note. They are going to be more apt to dip their toe in the water and see if they can get prices at which they will be willing to sell portfolios of companies.”