Sun Capital Goes To The Mattresses For Kellwood

If at first you don’t succeed, try getting hostile. That seems to be the working motto of Sun Capital Securities Group, which has pulled out all the stops in its effort to buy apparel maker Kellwood. Sun Capital is now engaged in a hostile takeover attempt of the St. Louis-based company, hoping that shareholders will approve a $762 million deal that could eventually send a significant portion to the debt markets.

The private equity firm, which has a 9.9% stake in the company, saw its buyout offer rejected twice by Kellwood’s board of directors last year and is now making its case directly to company shareholders.

“It doesn’t seem that Sun Capital is giving up easily,” said Scott Tuhy, a vice president and senior analyst with Moody’s Investors Service. Sun Capital has been trying to scoop up Kellwood since last summer, and it’s hoping that going over the heads of the board of directors will finally get the company into its portfolio.

To that end, Sun Capital is battling a bond tender offer that Kellwood hopes will give the quietus to the buyout effort. Kellwood has offered to buy back as much as $60 million of its 7.875% senior notes due 2009 in an effort it hopes will allow the company to buy back shares of its stock. Last week, the company extended the tender offer until Jan. 30, the day after its deadline for responding to the latest buyout offer. Sun Capital has sent a letter urging the company to terminate the buyback. Kellwood has asked its shareholders to not take any action concerning the private equity group’s buyout effort until the board has made a recommendation.

Sun Capital said it is prepared to bridge the entire purchase price of Kellwood from its own capital, eliminating the possibility that the deal would fall apart because of credit market difficulties. The firm says it often bridges the entire purchase price of a deal at closing and raises debt financing afterwards.

Typically, private equity firms have relied on underwriting investment banks to provide bridge financing for a deal. During the LBO boom that ended last summer, investment banks competed for these deals, and the credit crisis left banks with billions in hung equity bridges when the new issue markets seized up.

The firm has not given an indication of what the debt package would look like. A spokeswoman for Sun Capital Partners said no one from the firm was available for comment. Calls to a Kellwood spokesman were not returned by press time.

Sun Capital has a history of acquiring consumer companies with weak credit profiles. The firm, along with Golden Gate Capital, bought Eddie Bauer Holdings for $614 million in late 2006. Other companies in its portfolio that suffered from weak profiles when purchased include ShopKo Stores, Marsh Supermarkets and Mervyns Department Stores.

An Ally Emerges

The firm recently got a small boost in its efforts to sway shareholders when one of them, the Discovery Group, urged Kellwood to remove a poison pill and other measures and allow a shareholder vote on the issue. The Discovery Group has a 1.5% stake in Kellwood.

“My read is that they believe the offer still undervalues the company and that the current shareholders would benefit by [the company] executing management’s strategic plans,” said Tuhy, explaining the company’s fight against the buyout.

Those management plans of expanding the company’s portfolio of brand names have so far not borne fruit. Kellwood manufactures clothing under its own brand names such as Phat Farm, Baby Phat, Sag Harbor and Hanna Andersson and under licensing agreements for Calvin Klein, Oscar de la Renta, XOXO and others. It has lagged behind the times in terms of capturing market share in the apparel industry, according to Susan Ding, a credit analyst with Standard & Poor’s. “Things have changed within the industry, and they haven’t reacted as quickly in the moderately priced part of the business,” said Ding. “They’ve only started to add brands to its portfolio. That takes time, and they kind of missed the boat. … Other brands are gaining in the market, but they don’t have those in their stable.”

Tuhy adds that the company is in the middle of a transition, and while it is trying to acquire brands that have greater recognition among consumers, it is in a period of uncertainty. That same uncertainty faces private equity groups active in the apparel sector as well. “Because the headwinds facing the sector created uncertainty for the industry, it made it more challenging and created greater risk for private equity buyers,” he said.

Sun Capital’s offer price of $21 per share represents a 32% premium to its closing price on Nov. 9, 2007.

Sun Capital has offices in Boca Raton, Fla., New York and Los Angeles and affiliate offices in London, Tokyo and Shenzhen, China. The firm focuses on leveraged buyouts and also makes equity, debt and other investments in both public and private companies. It also focuses on turnarounds, underperformers and special situations. Sun targets companies in the industrial, consumer products and retail sectors with sales between $50 million and $500 million and revenues of up to $5 billion. —MS

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