- M&A Deals
Hartmarx Corp... Compelling acquisition for SKNL
Acquisition of HMX is a compelling value creating opportunity for SKNL and with a powerful “backend-frontend” synergy and has the potential to become one of the leading players in its segment in the world on a stand-alone basis.
Established in 1872, Hartmarx Corporation (“HMX” or the “Company”) is the largest USmanufacturer and marketer of men’s suits and formalwear and is based in Chicago andNew York. The Company operates at the mid to upper end of the apparel markets andoffers a wide selection of men’s suits and sports coats, men’s sportswear, trousers,shirts, ties, golf wear and denim products under some of the most highly recognizedbrands in the industry, including Hart Schaffner Marx and Hickey Freeman. TheCompany also offers women’s career apparel, designer knitwear and sportswear underbrand names such as Exclusively Misook, Christopher Blue and JAG Jeans.
HMX sells to the leading department stores in the USA, including:
• Dillards• Kohls• Neiman Marcus• Bergdorf Goodman• Macys• Barneys• Saks Fifth Avenue and• Bloomingdales
HMX has a deep brand legacy and loyalty. The average selling price of a HickeyFreeman suit is c. US$1,300 - US$1,500 and that of a Hart Schaffner Marx suit is c. US$600 -US$800. In addition to retailing in all the leading department and specialty stores in theUSA, the Company also has five retail locations of its own in New York, Chicago, SanFrancisco and Naples, Florida.
In addition to its own brands, the Company is also a licensee of severalforeign/American brands, including Austin Reed and Claiborne, among others.
The timeline of the transaction was as follows:
• On January 23, 2009 HMX announced that it filed for Chapter 11 BankruptcyProtection
• Wachovia/Wells Fargo and its other bankers provided HMX with a US$160mnDebtor-In-Possession (“DIP”) financing loan so that it could continue operatingits business in the normal course
• In early February 2009 certain interested parties including SKNL submitted initialindications of interest
• On April 15, after exhaustive due diligence SKNL submitted a bid to buy outselect assets and assume certain liabilities of Hartmarx
o US private equity firms Mistral Partners and Yucaipa also submitted bids• On June 25, 2009, the Bankruptcy Court entered an order approving the saletransaction between Hartmarx and SKNL
• On August 7, 2009, the sale transaction was consummated for an enterprise value of approximately US$120mn
Hartmarx’s existing lenders led by Wachovia/Wells Fargo have provided a new creditfacility to SKNL of up to US$95mn and a term loan of US$10mn to fund theacquisition of Hartmarx’s assets and provide for working capital. SKNL has made a US$25mn equity contribution into the Company and has further provisioned up to US$10mn in anticipation of any future working capital needs of Hartmarx.
Attractiveness of Business
Gross Margin ImprovementsFor the fiscal year ended November 30, 2008 the Company’s consolidated net saleswere US$493mn with a gross profit of US$160mn (32.5% gross margin).At the onset, the first leg of value-creation opportunity is a backend-frontendintegration synergy that will boost gross margins significantly. A 30% gross margin isextremely low for a business the size of HMX and operating in the market segment thatHMX brands operate in. We believe we will be able to boost gross margin upsignificantly by backward integration of production through our Indian manufacturingoperations and also through opportunistic sourcing from the Far East and CentralAmerica. Typically, a business like HMX should be operating at about 45%-50% grossmargin. However, we have estimated first year gross margin of 33% and over a fouryear period expect it to go up to 45%.
Manufacturing Outsourcing to India
As per our investment plan, we envision outsourcing part of HMX’s manufacturing toour plants in India. SKNL is adept at manufacturing products currently manufacturedand sold by Hartmarx, including suits, shirts and slacks. SKNL will be able to supplyfabrics from Reid & Taylor and Belmonte to HMX and finished garments from our suitsand shirt factory in Bangalore which will be operational within a year. This wouldfacilitate diverting export production of factories to better value-added products fromour fabric division and also provide immediate capacity for the new shirt and suitfactory. By conservative estimates, it is anticipated that the back-end synergy willprovide substantial additional profitable business to us within the next 3 years.
Iconic Brands in Tailored Clothing Business
Hickey Freeman and Hart Schaffner Marx are both iconic brands in the tailored clothingmarket. Both brands have over 100 years of legacy and history and have the potentialto become the biggest brand names in their categories. We believe that both brandscan be further leveraged in the US with a retail and wholesale expansion. Also, thebrands can be taken overseas to Europe, the Middle East, India and the Far East.Further, HMX owns 34 brands currently and several attractive licenses that can bebrought to the Indian market very effectively.
Operating Expense Reduction
Normalized operating expenses of HMX for the fiscal 2008 were at US$120mn (24% ofsales) which is extremely high. Prior to the acquisition, HMX employed close to 3,300people of whom 30% were non-manufacturing related. The abnormal buildup ofemployment was due to HMX’s acquisitions of businesses without integrating the backend.As per our negotiations we only acquired 3 of HMX’s 6 factories in North America.Further, our plan envisions reducing operating expenses to run at a normalized level ofUS$90mn. This will be achieved by company-wide salary reductions, realigninglogistics, shutting down unprofitable businesses, terminating unfavorable leases andoverall cost curtailment, amongst other measures. To that extent we have hired leadingturnaround specialists, Alvarez & Marsal, to assist with the overall expense reductionplan.
Immediately after the acquisition, SKNL restructured existing management and hiredDoug Williams at President and COO. Doug is an industry veteran who spent 17 yearsat Polo Ralph Lauren rising to President. Doug is a seasoned retail and apparel industryexecutive with deep experience in wholesaling, licensing, retail development andproduct sourcing and has relationships with all the leading US department stores. Dougis currently building out the full management bench at HMX. SKNL has retained severalkey managers and employees who we believe are highly competent and will be anintegral part of the growth of this business.
We believe that the acquisition of HMX is a compelling value creating opportunity forSKNL and with a powerful “backend-frontend” synergy and has the potential to becomeone of the leading players in its segment in the world on a stand-alone basis.
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