Going Private a New Route to Growth for Some Apparel Companies
The IPO market is ripe again, and apparel companies are jumping in—but with some hesitation. Despite the lure of public money and a fast track to expansion, more companies are taking a hard look at entering the public arena, and some are making an aboutface, discouraged by the mounting challenges of operating a public company.
With the passage of the Sarbanes-Oxley Act in 2002 and the constant threat of classaction lawsuits, operating a public company has become more costly than ever. A recent study by the national law firm Foley & Lardner, based in Chicago, showed that small to mid-size companies (with revenues of less than $1 billion) saw their operating costs rise by one-third in 2004, due primarily to Sarbanes-Oxley.
The legislation arose from the fallout of corporate scandals involving such companies as Enron, Tyco International and World- Com (now MCI). Its basic provisions hold companies more responsible for financial disclosure and, specifically, put more restrictions on the actions of a company’s directors, officers and accountants. The law also requires more thorough and independent auditing of companies and imposes longer jail sentences and fines on executives who misstate financial statements.
Foley & Lardner’s study also pointed out that many public companies are re-examining life on the NYSE and Nasdaq exchanges. About 20 percent of those public companies polled said they were contemplating taking their companies private.
“The magnitude of the average audit-fee increases, coupled with the reported lost-productivity numbers, confirm that the economic costs of Sarbanes-Oxley are not trivial or immaterial,” said Tom Hartman, a partner in the firm.
Recent moves by companies including Santa Monica, Calif.–based Mossimo and Dallas–based Haggar Corp. illustrate the migration to privatization. Mossimo, a Wall Street darling after it went public in the late 1990s, is in the middle of transforming itself into a private company again. Mossimo Inc. and Co-Chief Executive Mossimo Giannulli have reached an agreement to acquire all outstanding public shares in the company for $5 each. The estimated $22-million transaction is expected to be completed by the end of November. At that time, Mossimo Inc. and all of its entities will be folded into Mossimo Holding Corp. The company is in a quiet period, and executives did not comment on the goings-on.
The company sells its label exclusively to Target Stores in the United States and last year acquired menswear brand Modern Amusement.
Avoiding the cost of being a public company played into the company’s decision to go private, said B. Riley & Co. analyst Jeff Van Sinderen.
“For a lot of smaller companies, there’s not a lot of benefit to being a public company right now,” he said. “It’s much more challenging now.”
Van Sinderen said Giannulli is also looking at the move from an investment standpoint. The analyst said he sees lots of potential for Modern Amusement and considers the Target deal lucrative for the company going forward. “You might even see them go public again down the line,” he said.
Haggar Corp. is making a similar move. Investors Infinity Associates LLC and Perseus LLC and Hong Kong–based manufacturer Symphony Holdings Ltd. are paying $212 million, or $29 per share, for the company. Haggar is currently listed on the Nasdaq exchange. The transaction is expected to close by the end of the year. The company markets a branded line for men and women and also holds a license for Claiborne and Kenneth Cole shorts and pants.
Haggar Chief Executive J.M. Haggar, in announcing the deal, said the move will accelerate the company’s strategy of quality sourcing and will strengthen its marketing power.
“The net result will be a stronger, more nimble company that is better suited for growth in the global apparel market,” Haggar said in a statement.
First Dallas Securities analyst Christopher Terry said going private should benefit the company in the short run as well as the long run.
“The valuation multiple was more than generous. They’ve been managing, but the top-line growth has been nonexistent,” he said. “From Infinity’s standpoint, they get a leading brand and will strip out the cost and milk the cash flow.”
Interest in IPOs persists
Following up the heralded IPO filed by action sports brand Volcom, surfwear and other board sports brands in the sector have been a target for IPO underwriters, but some, like Morgan Creek, Calif.–based Fox Racing Inc., a privately held company that markets motocross- and BMX-inspired sportswear, have gone on the record saying that they have no interest in going public.
Yet, even with the rising cost and associated risks, the IPO market is up again after a long dry spell following the tech industry bust five years ago. There were 216 filings in 2004, compared to just 68 in 2003. Tech and retail IPOs are fueling new issues. Apparel companies are also becoming more active. Following up on Volcom’s issue earlier this year are retailers J. Crew and Citi Trends, an urban apparel merchant based in Savannah, Ga., and sportswear firm Under Armour.
Since being listed on the Nasdaq in June, Volcom has become a star on Wall Street as its stock has climbed by more than 30 percent since its opening. It will be presented with the California Apparel IPO of the Year award at the Los Angeles Fashion Awards on Oct. 21. The company raised $80 million in its IPO, which will be used for expanding international operations as well as boosting its marketing efforts around the world. The company reported a 47 percent increase in revenue for its latest reporting period. The cost of going public, however, ate into its bottom line as its tax status changed and figured into a 10 percent drop in earnings.
Doing business with public companies in the new era of regulations has been a two-fold issue, said Paul Charmandy, vice president of new business development for tags-and-labels supplier Paxar Corp., of White Plains, N.Y., which helps companies with trademark and brand protection agendas.
“When you work with a company that has to comply with Sarbanes-Oxley, you know it’s a clean company,” he said. “But to qualify as a supplier, you have to go through so much paperwork now. On the other hand, if you’re dealing with a private company in Asia or other sourcing country, you never know if they’re selling your name out the back door.”
Charmandy said the liability issues have also hampered public firms more than others. Mossimo and others have found that out the hard way. When the company first attempted to buy its outstanding public shares for $4 per share, it got hit with a couple of class-action suits. Mossimo eventually withdrew the offer and came back with the latest one.
