Hilfiger Makes a Bid on Value

Mr. Hilfiger better put on his pinstripes because a whole lot of negotiating is gonna be going down soon. After facing decreased growth in the U.S., Hong Kong-based company Tommy Hilfiger (NYSE:TOM) has decided it will auction itself off in a strategic move to create value and restore its fortunes. News of the auction sent shares soaring 11%, catapulting the corporation's equity to close at its highest level since spring 2004.

A quick look at the numbers illustrates the company's exhausted growth prospects in the U.S. through lower operating numbers in comparison with peers. Tommy Hilfiger currently stands at the bottom rung in comparison with competitors Motley Fool Stock Advisor pick Gap (NYSE:GPS) and Ralph Lauren (NYSE:RL).

A Comparison of FY2005 Figures

* Estimates. It should be noted that as a result of a federal investigation brought against Tommy Hilfiger Corporation, the company delayed filing its 10K for 2005. The company has not printed financial statements or filed quarterly reports for the second or third quarters of 2005. Therefore, the company's numbers are estimates and subject to change. The previously pending investigation thwarted the company from making reasonable after-tax estimates for the fourth quarter and fiscal year 2005.

Demand for the all-American brand began waning in 2000. The company has been in restructuring mode for the past two years and hasn't seen the value creation its shareholders seek. For the fiscal year ended March 31, 2005, net revenue decreased slightly from $1.87 billion in 2004 to $1.78 billion in 2005. Pre-tax income in '05 was $92 million, compared with $170 million in 2004. While Hilfiger Corporation is seeing a decline in revenue, competitors such as Ralph Lauren are seeing increases in revenue. Hilfiger's next step in strategic value creation? Selling.

So why would anyone want a company that appears to be in decline? Is there still room for Hilfiger to grow? In short, yes. The company may have lost its luster in the U.S., but not in Europe. Last year, Europe accounted for approximately 30% of the company's revenue. The company's European business is growing faster than its U.S. business and is expected to supersede its American wholesale business next year.

Aside from the inherent value in the European space, the company also recently settled a federal investigation that lasted 11 months. This will ease investors' apprehensions about the uncertainty of the outcome. The investigation had been looking into charges of buying office commissions in 1990 in order to lower the company's tax liability.

There could be a number of bidders in line for the clothing company. Chief executive of Tommy Hilfiger Europe, Fred Gehring, who is collaborating with Apax Partners to compose a buyout proposal, had better get in line -- he's just one of what could be a slew of potential buyers ranging from private equity to trade buyers. Those most familiar with the situation say Liz Claiborne Inc. (NYSE:LIZ) and Jones Apparel Group (NYSE:JNY) are possible bidders, as both companies are seeking acquisition targets.

In any event, value is in store for both buyer and shareholder. Shareholders can only hope that if Fred Gehring were to obtain control, he could parlay his successful managing capabilities of the European division (as seen through his ability to generate robust profits) to the U.S. segment.

If either of the women's clothing companies winds up being the acquirer, the synergies between these feminine brands and Tommy Hilfiger could be just the ticket. Tommy Hilfiger's menswear clothing line could compliment either company's women's lines, extending their customer bases and inevitably sales. Monetizing synergies means value creation for the acquirer in the way of sales, as well as for the shareholders who will also reap the rewards of the profits. While these companies have had a successful track record in selling women's apparel, it's important to consider whether they can achieve the same success selling men's clothing. Will the womenswear companies be capable of adjusting to the marketing strategies for menswear required to recoup their initial investment costs and capture sales?

Value creation could be in store for Tommy's shareholders. Past restructuring strategies haven't proved successful. Perhaps this value-added plan is the charm. I'll keep my eye on this one to see how it unfolds.

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Jennifer Schonberger does not own shares in any of the companies mentioned in this article.